WHAT TO DO IF YOU FIND YOU HAVE A WORTHLESS ASSET IN YOUR SELF-DIRECTED IRA KAAREN HALL
We had an account holder (we’ll call him Fred) with
such an asset. He made a note and the note went
bad. After quite some time (and after receiving no
account fees from him) we advised Fred we would
distribute the asset to him and close his account.
The rules are clear: assets must
have a fair market valuation
when taxable events occur.
Truth is, he wanted the account closed so this
seemed to solve a problem for him, but the problem
was not solved.
Fred did not want to pay the $500 fee to the
valuator to have the situation properly handled.
He put himself in a very bad position by not
spending the money. The IRS will likely send him
a nasty letter telling him that he owes taxes
(because assets were distributed and 1099'd at
the last known value). Then when Fred calls the
IRS, they will tell him to have the custodian
correct the 1099. We won't correct the 1099
because of no valuation (and in this case no
fees). The IRS is likely to not take his "word" for
what the value currently is. In fact they likely will
not care because of crossing tax years. They will
tell our account holder to prove it was worthless
The rules are clear: assets must have a fair market
valuation when taxable events occur. To get this
kind of valuation you need to seek the help of a
back at the time it was distributed. That usually
requires
foreclosure/court
documents
or
a
valuation.
valuator. If the asset is real estate then often an
appraisal will do. In lieu of this kind of third-party
So, Fred gets caught in this endless loop.
authenticated value all we can reasonably do is use
the last known value.
Keep in mind that the
valuator needs to be “independent”.
Using your
personal CPA for the valuation is usually not
considered to be independent enough. Additionally
the
report
itself
must
have
business with a self-directed IRA. In fact, we
include
this
information
on
the
account
agreement.
supporting
documentation and computations attached to the
report.
Bottom line is that this is the cost of doing
In the end he will wish he had spent the $500 for
valuation.