In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses some statistics and trends about IRS audits and if investing in alternative assets puts you more at risk for one.
The phrase “IRS audit” might strike fear into you. No one wants to go through the process of an audit. Even when you know you did nothing wrong, it’s still a scary situation. Having to get professional help, dig up all your records and open your life to the IRS can takes its toll. While retirement account may be at risk for an audit, the numbers suggest you really have nothing to be concerned about. It doesn’t matter if you invest in traditional assets or alternative investments, such as real estate or cryptos.
Are you at Risk of an IRA Audit?
While we won’t discuss all the numbers Adam talks about it (listen to the podcast!), we will share a few. Last year, the IRS audited about one in 220 individual taxpayers. Ten years ago, that number was close to one in 90. The IRS just doesn’t have the budget to go after tax cheats as hard as they used to. Of course, that’s not to say that won’t find you if you do try to evade your tax responsibilities. But for the average person, so long as you file your taxes correctly, you are at no risk of an IRS audit. In the event it does happen, you should be prepared and keep a record of your transactions and investments.
Similar to regular audits, the trends of 401(k) plans getting audited are on the decline. There are about 600,000 401(k) plans. When you add in Solo 401(k) plans with less than $250,000 (meaning you don’t need to file Form 5500), there’s probably closer to two million plans out there. Only 165 Form 5500s were examined for the 2019 fiscal year, down from the previous year.
Mr. Bergman breaks down the numbers even further in this episode, but you can see that not many 401(k) plans are audited. If you are self-employed with a Solo 401(k) plan, you will have to file with the IRS. This is simply an information form, showing the value of the plan.
What About IRAs?
Interestingly enough, the IRS doesn’t have a department that specifically deals with IRAs. Therefore, there are no exact statistics to go by. IRA custodians file Form 5498 showing the value of IRAs. No specifics are given, just generic numbers about how funds are invested.
The Government Accountability Office recently issues a report about IRAs and the need to educate the IRS more about the plans and investments made. From that report: “Noncompliance involving IRAs with unconventional assets is generally detected through labor-intensive audits of individual taxpayers. IRS’s SB/SE division uses field audits to pursue complex individual tax return cases, including those that could involve IRAs with unconventional assets. …from fiscal years 2012 to 2016, IRS audited about 26,000 tax returns with IRA issues.”
Essentially, audits were conducted and those performing them inquired about retirement plans. That number of audits for IRA plans were discovered across millions of regular audits that occurred in that time-frame.
What Does this Mean for You?
The moral of this podcast is to not be afraid of an IRS audit! Retirement plans are not targeted, even if they are invested outside of the traditional stocks, bonds and mutual funds. The IRS is all about numbers. For the most part, they simply want to know the value of your retirement plan. Therefore, once you start taking distributions, you are paying your fair share to the government.
Retirement plans are all about saving on taxes, but you do have to pay them at some point. So long as your not trying to hide anything from the IRS and you’re not doing anything illegal, you will be fine. Yes, an audit can create stress, but they’re not all that scary if you are prepared for one. Don’t let that minuscule risk deter you from investing the way you want. You are not at any more risk if you choose to invest in real estate with IRA Financial than you are when investing in stocks at your local bank!
Thanks for Listening
We hope that we’ve eased your minds a bit if you had any concerns about a possible IRS audit. Remember, investing in alternatives assets is not against the rules. The Internal Revenue Code explicitly states what you cannot invest in. So long as you stay within the rules, your retirement funds are safe!
Thanks for listening and be sure to tune in next time for another episode of Adam Talks! Check out our SoundCloud page for all episodes and we’ll see you soon!