A Sign of Things to Come?

Although still in “Draft” format, the IRS has made some changes that affect IRA and 401(k) reporting. The recently issued instructions for the 2014 IRS Forms 1099-R and 5498 have added some reporting duties for the IRA Custodian/Trustee that very likely will affect the IRA and 401(k) Owners.

IRS Form 5498 includes the reporting of the IRA’s year-end Fair Market Value, not cost or book value, but FAIR MARKET VALUE (FMV).

There now is new reporting clearly identifying non-cash investments and those not easily valued by some national market. The IRS now wants all IRAs with these type of assets, like closely held stock, unlisted partnerships, Limited Liability Companies (LLCs), etc. to be clearly identified.

To clarify, if the IRA has Microsoft stock in it, there will be no change in the reporting because Microsoft is listed on a national market. If however the IRA or has invested in a real estate purchasing LLC, that year-end reporting will be changed.

Since 401(k)s do not report on IRS Form 5498, these instructions do not affect them. However, we expect a similar reporting change for 401(k)s.

IRS Form 1099-R reports IRA distributions. The instructions for 2014 have also been changed for this form. Starting in 2014, all distributions in-kind must now be specifically noted and coded indicating it is the distribution of the non-cash assets of closely held stock, unlisted partnerships, Limited Liability Companies (LLCs), etc. In-kind means you have taken a distribution of the property held in the IRA.

Starting in 2014, that in-kind distribution will now be specifically coded identifying it as a distribution of property at FMV not listed on a public, national market. The distribution will continue to be reported at the FMV on the date of distribution.

It should be noted here that the reporting of the Fair Market Value in year-end reporting and in the distribution of non-cash assets has been a previous, long-standing requirement. The change for 2014 just means the non-cash assets are now being specifically reported.

What does this mean? That’s a good question. If history is any teacher, whenever the IRS starts to require reporting of something new, more IRS scrutiny is sure to follow. Therefore, more diligence should be taken when obtaining the FMV of these IRA and 401(k) assets.