IRS losing the battle over mega-IRAs as company founders fill retirement accounts with nonpublic stock

Outgoing Senate Finance Committee chair urges IRS, Treasury to step up

Nov 20, 2014 @ 11:00 am

By Bloomberg News

Corporate and private equity executives can accumulate millions of dollars in tax-favored retirement accounts, taking advantage of gaps in the law and IRS enforcement, according to a Government Accountability Office study.

The Internal Revenue Service has trouble fighting back, because legal disputes over asset values in individual retirement accounts are complex and time-consuming, the report said. Also, the IRS has a three-year deadline for challenging an individual's tax return.

“The result is a revenue loss to the federal government through a circumvention of the longstanding rationale for IRA contribution limits,” the report said.

The report expands on data released by the GAO in September. In 2011, about 9,000 taxpayers had IRAs with balances exceeding $5 million each.

Wealthy individuals can get around the annual IRA contribution limit of $5,500 for 2014, plus another $1,000 for people 50 and older.

Company founders can fill retirement accounts with stock that isn't publicly traded. They use low values to stay technically under the contribution limit. After the stock rises in value, they can convert it into something more liquid.

The GAO report said IRAs were designed as a retirement savings vehicle, not as a way to shield wealth. Founders and private equity executives may know enough about a company's prospects to know which undervalued stock to put inside an IRA.


The report included one example in which one company's shares were valued at $0.00125 each in 2008 and 4 million shares were placed in a Roth IRA. As the company got a venture capital investment, went public and saw its share price go to $60, the founder could end up with $196 million in the IRA, according to GAO.

The report didn't identify the company it analyzed and said the $196 million scenario was based in part on securities filings.

Roth IRAs are funded with post-tax money, and owners don't have to pay any taxes when they remove the money. In contrast, investments outside retirement accounts are subject to capital gains taxes of up to 23.8%.

Ron Wyden, chairman of the Senate Finance Committee, urged the IRS and the Treasury Department to implement the report's recommendations.


“On one hand you've got people sheltering millions of dollars in mega IRAs, while at the same time nearly a third of Americans have nothing set aside for retirement,” the Oregon Democrat said in a statement. “It's abundantly clear that America needs a better system and tax code that supports retirement planning for all Americans.”

Mr. Wyden will lose his chairmanship when Republicans take over the Senate in January.

The issue of large IRAs gained attention during the 2012 presidential campaign. Republican nominee Mitt Romney reported an account that had as much as $102 million at one point. Mr. Romney was a co-founder of Bain Capital.

The IRS is working on an agency-wide strategy to address noncompliance in IRAs, Deputy Commissioner John Dalrymple wrote in a response to the report.

GAO made several technical recommendations for the IRS and urged Congress to consider legislative action.


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