What 2017 IRS Audit Data Mean For Self-Directed IRAs And Solo 401(k) Plans

&l;p&g;Last month, the Internal Revenue Service released its 2017 audit data for the 2016 tax year, during which the IRS audited almost 1.1 million tax returns, approximately 0.5 percent of all returns filed in calendar year 2016. &a;nbsp;According to data obtained by the Wall Street Journal, audits have fallen for the sixth straight year with only 0.62 percent of taxpayers being examined by the IRS in 2016. The numbers have dropped dramatically since 2010, where audits reached a high of one for every 90 filers that year.

The same trend can be seen in the area of retirement plans, such as 401(k) Plans.&a;nbsp; Unfortunately, the IRS does not release any audit data pertaining to IRAs and IRS Form 5498, the form responsible for reporting annual IRA valuation and related data.&a;nbsp; One likely reason for this is that IRS Form 5498 is filed by the IRA custodian and not the individual taxpayer.

In the case of a tax-exempt organization, employee retirement plan, government entity, tax-exempt bond returns, and related taxable returns, in 2017, the IRS audited 15,397 returns, down from 17,380 for the previous year. The IRS did not disclose the total number of returns that were filed.

With respect to 401(k) plans, in 2017, the IRS audited a total of 2,578 Form 5500 returns, which is the annual return for all defined contribution (i.e. 401(k)) and defined benefit plan.&a;nbsp; Whereas, in 2016, the IRS audited 2,882 Form 5500 returns.&a;nbsp; Of the 2,578 Form 5500 returns audited in 2017, 215 were for Solo 401(k) plans (IRS Form 5500-EZ), up from 187 the previous year.

For retirement investors that were required to file IRS Form 990-T, because they generated unrelated business taxable income (&a;ldquo;UBTI&a;rdquo;) either buy using leverage to buy real estate or investing in an active business through a pass-through entity, just 608 of those returns were audited, down from 745 the year before.

With respect to Self-Directed IRAs, the IRS does not offer much audit data since they do not disclose the number of Form 5498 returns audited.&a;nbsp; However, the IRS did report that in 2016 they audited just&a;nbsp;five Form 5329 returns, which is the return filed by taxpayers who took early IRA or 401(k) plan distributions.

Overall, we are seeing a reduction in the number of tax and information returns audited by the IRS, including for employee retirement plans, such as 401(k) Plans. However, one exception is for Solo 401(k) plans, which saw a slight increase in 2017.&a;nbsp; One reason for this is the IRS budget reduction. The IRS was given $11.2 billion in the 2017 federal budget, eight percent less than the agency received at its peak in 2010.

Whether you are an individual, entity, tax-exempt organization, or retirement plan, your chances of audit are decreasing.&a;nbsp; Nevertheless, it is still vital that you work with tax professionals to make sure that you are complying with all IRS tax and reporting requirements.&l;/p&g;

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