What is the penalty for a prohibited transaction?

The first-level penalty under section 502 (i) is 5% of the amount involved. 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, including any IRA backed by Gold. 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 tax 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).

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 any case where an initial tax is imposed under subsection (a) on a prohibited transaction and the transaction is not corrected within the taxable period, a tax equal to 100 percent of the amount involved is imposed. Which, once again, can be considered a prohibited transaction and disqualify the IRA (since the owner of the IRA would be a party to the prohibited transaction). This means that it is time to be more aware of the risks of prohibited transactions and of the situations that can trigger them, not only with regard to self-managed IRAs and the increasing use of various types of “alternative investments” that may have adverse consequences, but also to “simpler” situations, such as possible prohibited transactions with financial advisors who are compensated for investing the IRA dollars of family members.

Fortunately, in the past, the IRS has been fairly lax in pursuing and trying to enforce transactions prohibited by the IRA. In other words, “ignorance” is no excuse when it comes to prohibited IRA transactions, nor are the assurances of a self-directed IRA provider about the viability of holding several alternative assets in a self-directed IRA. The terms “correct” 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 position no worse than it would be if the disqualified person acted in accordance with the highest fiduciary standards. And the IRA itself must pay for those services with the IRA's own 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.

In addition, since an IRA is intended to be treated as a retirement account with tax preferences separate from the IRA owner's other assets, the Internal Revenue Code also contains a series of “prohibited transactions” rules designed to prevent the IRA owner from using the account to enrich himself or his family members (without actually making a taxable withdrawal). In fact, the GAO expresses concern that some types of alternative investments are sold in self-directed IRA accounts in a way that enriches the seller or promoter if the transaction closes, but denies any liability if the investment turns out to be a prohibited transaction, since in situations where the self-directed IRA provider offers “control of the checkbook”, ultimately, it remains the owner of the IRA to determine that all and each of the checks comply with the transaction rules prohibited. 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. 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 the 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).

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. The reality is that the transaction rules prohibited for IRAs have existed for as long as the IRAs themselves have existed. In addition, the holder (or beneficiary) of the IRA is considered to have received a distribution on the first day of the fiscal year in which the prohibited transaction occurred. .