Self-Directed IRA: Under attack from the IRS [EPISODE #1]

by | Feb 2, 2015

Previous Episode of Self Directed Investor Talk     Subscribe to Self Directed Investor Talk     Next Episode of Self Directed Investor Talk

Self-Directed IRA: Under attack from the IRS [EPISODE #1]

by | Feb 2, 2015

What kind of common, everyday retirement account is being investigated by the US government and being targeted by the IRS for audits?  I’m Bryan Ellis, and you’re about to find out RIGHT now in Episode #1 of Self Directed Investor Talk...

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Ok folks… let’s look deeply into some ugly but necessary reality for self-directed investors.

While we’re doing that, remember – to participate in this show with your questions or comments, just send email to or reach out to me on Twitter at SDITalk.

My friends, it’s the worst nightmare of most Americans:  To be the target of an audit from the IRS. It’s made even worse when the audit targets your retirement savings, and risks literally every single penny you’ve put away for your golden years. But for a rapidly growing number of Americans, that’s exactly what’s happening.

The US government presently faces a national debt of nearly $20 trillion (as of this update on 3/6/2017).   That debt increases by about $1.5 billion every single day. To put it lightly, the situation is dire.  The IRS is tasked with the collecting the revenue to make up that shortfall, and they are aware of one important fact:  There are well over $24 trillion stashed away by Americans in their retired accounts and of that, over $5 trillion is in IRAs alone.

Now the IRS will probably prefer to be able to take every penny of that and just get rid of the entire national debt problem. But they can’t do that. So which portion is easiest for them to attack? The answer is clear:  self-directed IRAs.

What is a self-directed IRA? It’s a special type of IRA that allows the account holder the full range of flexibility provided by law rather than the very limited range of options offered by most financial firms. For example, at most financial firms, you’re strictly limited to investing your retirement funds into stocks, bonds or mutual funds.

But what happens if you’re offered the chance to invest an asset that doesn’t fit in the typical retail investment category that Wall Street loves to push?

Well, my friends the answer is this. Even though real estate deals, or privately traded companies or even commodities or precious metals could be a huge financial opportunity for your retirement account, and even though there is absolutely no legal prohibition of these types of investments for your IRA, you’re still out of luck, unless your IRA is held at one of the very few IRA companies that cater to Self-Directed Investors.

But why is the IRS intent on attacking self-directed IRAs?  There are several reasons, but the biggest reason is this:  if you commit even the tiniest of errors in the context of your Self directed IRA, the taxes, penalties and interests that the IRS could demand could exceed the entire value of the account. So, clearly the potential payoff for the IRS is huge and attacking self-directed IRAs.

And unfortunately, it’s really easy to commit one of those grave errors. Imagine this scenario:  You’ve purchased a rental property in your self-directed IRA. It’s in great condition and tomorrow your property manager has scheduled several showings to find your next tenant. You drive by the property today, and notice that the flag on the mailbox is broken and dangling.

No big deal you think, so you drive down to the local store and spend a few bucks on a flag, take it back to the property and install it on the mailbox.

Well, bad news my friend. You may have just destroyed your IRA and subjected it to huge financial penalties. That’s because the IRS is allowed to interpret your purchase of the mailbox flag, and your provision of labor to install it as additional disallowed contributions to your IRA.

You were just making an incredibly minor, nonessential repair and it could cost you tens or hundreds of thousands of dollars. If the audit that discovers this transgression doesn’t happen for several years, it’s entirely possible that the taxes, penalties and interests could accumulate to a point, where they will eat up the entire value of your IRA, all from fixing a mailbox.

These transgressions are called prohibited transactions in tax parlance. There are hundreds of other ways to commit one of them through a self-directed IRA. That’s exactly why the IRS is focused on this highly vulnerable subset of the retirement account world. It’s these prohibited transaction rules that make self-directed IRAs, the low-hanging fruit, in the IRS’s quest to collect enough money to pay down the $20 trillion national debt.

My friends, this is not theoretical. On November 19th, Democrat senator, Ron Wyden of Oregon demanded an investigation into all self-directed IRAs.  (Update 3/6/2017... the Government Accountability Office has now created 2 different reports on this matter - October 2014 and December 2016 - along with the proposal of a piece of terrible legislation for Self-Directed IRA owners known as the "RISE Act Proposal"... who you vote for matters!)

This sector is getting serious attention from the Feds. It’s only going to get worse from here. But I’d like to give you some good news. Self-directed IRAs are 100% legal. It’s actually quite simple to keep them in full compliance, so that even if the IRS does come calling, you’ll be fine.

But pay close attention to this my friends, there is one very common strategy being used among self-directed IRA owners. This is like a bright shining beacon, practically demanding that the IRS take a closer look at your IRA.

In fact, if you’re using this strategy – and many, many people are – your account custodian is now legally required to report you to the IRS. But the strategy is so powerful, and offers so much flexibility… It’s so full of profit potential that it’s almost impossible to ignore and many people are using this strategy, as they should, because it’s 100% in compliance with the law.

So, what is that strategy? I’ll tell you all about it in episode No. 2 of the Self Directed Investor Talk show, which is available for download right now, right here on SelfDirected.org but also on iTunes, iHeartRadio and on Stitcher.  Go ahead and download it right away.

Self Directed Investor Talk
Self Directed IRA Fundamentals
Self Directed IRA Custodians
Self Directed IRA FAQ

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Bryan Ellis is host of Self Directed Investor Talk, America's #1 radio show and podcast for affluent self-directed investors.  He's also an expert in self-directed IRA's, solo 401k's and turnkey rental property investing... at least, that's what his wife tells him 🙂  He's a contributor to well-respected publications like TheStreet.com, Entrepreneur and ThinkRealty.  Bryan lives in metro Atlanta, Georgia with Carole Ellis - his wife, business partner and best friend - and his 4 children ranging in age from 2 to 19.