Individual Retirement Accounts: Formalizing Labor's and IRS's Collaborative Efforts Could Strengthen Oversight of Prohibited Transactions
Fast Facts
If you have an individual retirement account (IRA), you know its tax breaks can make it easier to save for retirement. Most IRAs hold investments in traditional assets like stocks and mutual funds. But if you want to invest in non-traditional assets like real estate or virtual currency, your IRA might run afoul of tax laws. You can, however, apply for an exemption from the Department of Labor. The IRS and Labor each have IRA oversight duties. Labor reviews these applications.
We saw evidence that Labor contacted IRS in only 8 of the 124 applications we reviewed. We recommended the agencies establish a formal collaboration process.
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Highlights
What GAO Found
The Department of Labor (DOL) has a process to grant administrative exemptions for individual retirement account (IRA) transactions that would otherwise be prohibited by law, such as an IRA buying investment property from the IRA owner. DOL evaluates applications using statutory criteria and follows administrative procedures codified in regulations. Applications for proposed transactions that are substantially similar to certain other transactions previously granted exemptions may follow an expedited process.
Prohibited Transaction Exemption Applications for Individual Retirement Accounts Processed by the Department of Labor (DOL), January 1, 2006 through May 16, 2017
|
Application status |
Individual |
EXPROa |
|
Withdrawn |
28 |
28 |
|
Granted |
20 |
28 |
|
Denied |
11 |
5 |
|
Closed administratively or other |
4 |
n/a |
|
Total |
63 |
61 |
Source: GAO analysis of DOL data. | GAO-19-495
aEXPRO is the common name for a class exemption that allows DOL to authorize relief from the prohibited transactions rules on an expedited basis, generally a shorter period of time than it takes to review individual applications.
As shown in the figure, GAO found that roughly half (56) of the IRA prohibited transaction exemption applications it reviewed were withdrawn by the applicant before the review process was completed. In reviewing processed applications, GAO found that most of the prohibited transactions for which an exemption was sought involved the sale of IRA assets. With regard to DOL's application review process, GAO found that DOL has not sufficiently documented internal policies and procedures to help ensure effective internal control of its process. Documenting procedures could increase transparency about how applications are handled, reduce the risk of DOL employees carrying out their duties inconsistently, and provide a means to retain organizational knowledge should key personnel leave unexpectedly.
Although DOL and the Internal Revenue Service (IRS) share some information as part of their oversight responsibility for prohibited IRA transactions, no formal mechanism exists to help guide collaboration between the agencies. Of the 124 IRA applications GAO reviewed, only eight reflected DOL contact with IRS. GAO found that DOL has information about requested exemptions to prohibited IRA transaction rules that could be useful to IRS in carrying out its oversight responsibilities. For example, DOL does not share information on denials—information that could be useful as prohibited transaction examples for IRS examiner training and educational outreach to IRA owners. In prior work on interagency collaboration, GAO has found that formal agreements, such as a memorandum of understanding, can help agencies monitor, evaluate, and update interagency collaboration. Formalizing the sharing of information between DOL and IRS regarding IRA prohibited transaction exemptions could help the agencies better support their current coordination efforts and identify additional opportunities for greater collaboration.
Why GAO Did This Study
IRA owners are able to invest in a wide variety of assets, but they are prohibited from engaging in certain transactions involving IRA assets. IRA owners who engage in prohibited transactions may incur increased income tax liability, additional taxes, and the loss of the tax-advantaged status of their accounts. DOL can grant exemptions from the prohibited transaction rules. IRS enforces tax laws relating to IRAs and can assess additional taxes.
GAO was asked to examine (1) DOL's process for granting exemptions for prohibited IRA transactions and outcomes of that process, and (2) the extent to which DOL and IRS collaborate on oversight of prohibited transaction rules for IRAs. GAO reviewed relevant federal laws and regulations; examined agency guidance, exemption process documentation, and application case files; assessed interagency coordination using internal control standards and prior work on interagency collaboration; and interviewed DOL and IRS officials.
Recommendations
GAO is recommending that DOL and IRS establish a formal means—such as a memorandum of understanding or other mechanism—to collaborate on oversight of prohibited IRA transaction exemptions. GAO is also recommending that DOL document policies and procedures for managing the exemptions process. DOL and IRS generally agreed with GAO's recommendations.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Labor | The Secretary of Labor should document internal policies and procedures for managing the IRA prohibited transaction exemption process. (Recommendation 1) |
DOL agreed with this recommendation and planned to create an internal procedure manual which will document the Office of Exemption Determinations' process for managing IRA prohibited transaction exemption applications. In January 2021, DOL stated that the process and procedures applicable to applying for, reviewing, granting, or denying an exemption request are set forth in 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27, 2011). DOL's Office of Exemption Determinations (OED) follows these written codified procedures when processing applications for exemptions involving IRAs or ERISA covered plans. OED grants exemption only after making the required statutory findings and management is directly involved in the operational processes of the office. OED developed and implemented an internal procedural manual which documents the internal process for managing IRA prohibited transaction exemption applications, including a procedure to coordinate with the IRS. GAO confirmed that the OED's new internal procedural manual documents this process in detail and provides for a procedure to coordinate with IRS on IRA prohibited transactions.
|
| Department of Labor | The Secretary of Labor, in consultation with the Commissioner of Internal Revenue, should establish a formal means, such as a memorandum of understanding or other mechanism, to support and guide DOL's and IRS's collaborative efforts to oversee IRA prohibited transaction exemptions. (Recommendation 2) |
DOL agreed with GAO's June 2019 recommendation and has taken action working with IRS to establish a formal coordination mechanism to support their shared oversight of IRA prohibited transaction rules. In August 2019, DOL agreed to contact IRS within 25 days of DOL's Office of Exemption Determinations receiving an IRS prohibited transaction exemption application. DOL is to relay the nature of the exemption application while not identifying the specific application to avoid disclosure concerns. DOL documented the new coordination mechanism in its internal procedure guide issued in December 2020. If effectively implemented by DOL and IRS, the formal information sharing will help DOL determine if an IRA exemption would raise tax law issues for IRS.
|
| Internal Revenue Service | The Commissioner of Internal Revenue, in consultation with the Secretary of Labor, should establish a formal means, such as a memorandum of understanding or other mechanism, to support and guide DOL's and IRS's collaborative efforts to oversee IRA prohibited transaction exemptions. (Recommendation 3) |
IRS agreed with GAO's June 2019 recommendation and has taken action working with DOL to establish a formal coordination mechanism to support their shared oversight of IRA prohibited transaction rules. In August 2019, DOL agreed to contact IRS within 25 days of DOL's Office of Exemption Determinations receiving an IRS prohibited transaction exemption application. DOL is to relay the nature of the exemption application while not identifying the specific application to avoid disclosure concerns. DOL documented the new coordination mechanism in its internal procedure guide issued in December 2020. If effectively implemented by IRS and DOL, the formal information sharing will allow IRS to raise tax law issues for DOL consideration. Using the coordination mechanism, IRS Office of Chief Counsel is responsible for coordinating with DOL on tax law issues. In July 2021, this office told GAO that it will reach out to other IRS units as needed. The information sharing from DOL, if effectively communicated within IRS, could help IRS identify emerging issues or trends in potential prohibited transactions marketed to IRA owners.
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