The first-level penalty under section 502 (i) is 5% of the amount in question. The amount involved means the amount of money and the fair market value of the other property delivered or the amount of money and the fair market value of the property received on the date the prohibited transaction occurred. A tax is hereby imposed on every prohibited transaction. The tax rate will be equal to 15 percent of the amount involved with respect to the prohibited transaction for each year (or part of it) of the taxable period.
The tax imposed under this subsection shall be paid by any disqualified person participating in the prohibited transaction (except a trustee acting solely as such). However, while these investments are not specifically prohibited from being owned by an IRA, additional difficulties do arise because of the limitations that exist between IRA owners and their individual retirement accounts. In the event that someone other than the holder of the IRA or the beneficiary of the IRA (for example, another disqualified person) makes a prohibited transaction, that disqualified person may be punished with certain penalties. And the lack of consumer education is worrying, since avoiding “errors” in an IRA that could cause a prohibited transaction is still the responsibility of the account owner.
The reality is that the transaction rules prohibited for IRAs have existed for as long as the IRAs themselves have existed. In such a situation, the broker would face a 15% fine for making a prohibited transaction as a disqualified person, which could amount to a 100% fine if the transaction is not annulled (i). The terms “correctness” and “correct” mean, with respect to a prohibited transaction, to undo the transaction as far as possible, but in any case to place the plan in a financial situation no worse than it would be if the disqualified person acted in accordance with the highest fiduciary standards. Fortunately, the reality is that prohibited IRA transactions are quite rare, due to the simple fact that the vast majority of IRA assets are only invested in traditional publicly traded securities, where a prohibited transaction is generally not feasible in the first place.
Specifically, section 4975 of the IRC stipulates that the owner of an IRA (and any other person responsible for the IRA account) is prohibited from combining the financial interests of the IRA itself with those of its owner or any other related party, since all of these people are considered “disqualified persons”. In addition, most IRA custodians or fiat IRA providers only offer “traditional investment opportunities”, in which there is virtually no possibility of initiating a prohibited transaction anyway. And the IRA itself must pay for those services with IRA cash, since the owner of the IRA paying for the services on behalf of the IRA asset would again be a prohibited transaction or, at least, a considered contribution. Fortunately, in the past, the IRS has been fairly lax in pursuing and trying to enforce transactions prohibited by the IRA.
And, of course, it would be forbidden to attempt to transfer existing real estate from the owner of an IRA to the IRA (since even the sale of real estate at a fair market price by the owner of the IRA to the IRA is still a prohibited transaction, since the owner of the IRA is still a disqualified person). This, once again, can be considered a prohibited transaction and disqualifies the IRA (since the owner of the IRA would be a party to the prohibited transaction).