What does the 2018 IRS audit mean for your self-directed retirement plan?
The Internal Revenue Service (IRS) recently released its 2018 IRS audit data for the 2017 tax year. Overall, there was an increase in retirement plans audited by the IRS, however the numbers are still very low.
The IRS examined returns for individual businesses, pension plans, defined contribution plans and benefit plans. In total, the number of returns examined in 2018 was 15,562, a slight increase from 15,397 returns examined in 2017.
IRA Form 5498
Once again, the IRS did not provide any data on individual retirement accounts. There is a common thought that the lack of IRS audit interest among IRAs is due to the low level of abuse among IRA investments. For example, of the 50 million IRAs, approximately 97% of investors use their retirement funds to make traditional investments. Additionally, IRS Form 5498, which reports annual IRA valuation and related data, is filed and prepared by the IRA custodian, bank or financial institution, not the retirement account holder themselves.
In the case of Forms 5500, 5500-EZ and 990-T, it is filed by the individual or the business in the case of the 401(k). Less than 1% chance of your Solo 401(k) to be audited, and if you work with professionals, such as the IRA Financial, you have nothing to worry about.
Forms 5500 & 5500-EZ
Form 5500, for the employee-sponsored 401(k), decreased to 2,510 for the 2018 fiscal year. The previous year, the number of returns examined was 2,578, still very low.
While the total number of employer-sponsored 401(k) plans may have dropped, the same cannot be said for the Solo 401(k) plan. The IRS audit numbers reflect a slight increase of Solo 401(k) plans that were audited in 2018, with 340 returns examined, a slight increase from 295 the previous year.
If your Solo 401(k) Plan has more than $250,000 in assets, you will need to file a simple form called 5500-EZ. If you work with a professional, such as IRA Financial, it is very unlikely that you will be audited.
In the case of individuals who have less than $250,000 in assets, there is nothing to report.
Unrelated Business Taxable Income (UBIT) Form 990-T
For individuals who trigger UBIT, Form 990-T audit rate went down in 2018. Form 990-T only applies to those who use margin to buy stock, a non-recourse loan to buy real estate, or invest in an active trade or business through a passthrough entity.
2018 IRS Audit Data Overview
Overall, the 2018 IRS audit data reflects that retirement account holders have very little to worry about, as the IRS does not perform aggressive audits on retirement plans. The objective is simply to review the returns. If you work with a professional, such as IRA Financial, to prepare and file the respective form for your retirement plan, it is very unlikely that you will be audited by the IRS.
401(k) Audit Data
2017: 2,578 returns examined
2018: 2,510 returns examined
Solo 401(k) Audit Data
2017: 295 returns examined
2018: 340 returns examined
Defined Contribution Audit Data
2017: 215 returns examined
2018: 260 returns examined
UBIT Audit Data
2017: 608 returns examined
2018: 549 returns examined