Self Directed IRAs, Prohibited Transactions, and the IRS Statute of Limitations: Thiessen v. Commissioner

By: Mat Sorensen, Attorney & Author of The Self Directed IRA Handbook

In the recent case of Thiessen v. Commissioner, 146 T.C. No. 7 (2016), the Tax Court considered how long the IRS has to allege a prohibited transaction against self directed IRAs. In general, the IRS must allege a prohibited transaction against self directed IRAs within three years after the return is filed. IRC 6501(a). However, that time-period may be extended another three years for a total of six years pursuant to IRC 6501(e)(1) when the taxpayer fails to report an amount that is in excess of 25% of the gross income stated in the return.

For prohibited transaction rule violations, a failure to report occurs when you don’t disclose the prohibited transaction to the IRS or when you fail to claim the distribution that occurs from a prohibited transaction on your personal tax return. A prohibited transaction could be disclosed to the IRS through attachments to the return or other correspondence but the Tax Court first looks to see what was reported to the IRS on the IRA owner’s personal 1040 tax return for the years in question. In other words, if you don’t volunteer clear information of a prohibited transaction to the IRS then the limitation period can be extended up to a total of six years so long as the prohibited transaction would result in a gross income in excess of 25% of the taxpayer’s personal return. Note: IRS Form 5329 is used to declare a prohibited transaction on your personal return.

There are a few very important takeaways from the Tax Court’s ruling in Thiessen and from the IRS Internal Revenue Manual on Prohibited Transactions.

READ MORE:  http://www.sensefinancial.com/self-directed-iras-statute-limitations/