Pub. 7 2017-2018 Issue 5

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S March • April 2018 19 exercise caution when relying wholly on the value used for property taxes. What Are an Organizations’ Responsibilities? As IRA administrators, financial organizationsmust report an IRA’s FMV to both the IRS and the IRA owner every year. The financial organization must also be able to ascertain the FMV of an IRA investment that is distributed in-kind (i.e., a distribution of assets rather than cash). These requirements are not absolved because an investment is hard to value. Because the IRS has no guidance on how to value these assets, financial organizations should consult with their legal counsel to establish procedures for obtaining the required FMV. These procedures should include the time frame for obtaining an independent valuation, the circumstances for when to use a nonindependent valuation, and the steps to take when a valuation is not reasonable. If a financial organization uses an independent appraiser or broker, the organization still has a duty to evaluate andmonitor the appraiser or broker—as it would for any other professional service used. Because the burden of producing a reasonable valuation ultimately is on the financial organization, it should demonstrate a good faith effort in selecting, directing, and monitoring the appraiser or broker by keeping documentation. The trust agreement with the IRA owner should clearly list each party’s duties, including how valuations are obtained, how often, and who pays for them. The cost of the appraisals may be paid from the IRA or it could be part of the agreement that the financial organization provides for a fee. Disputes may arise if these logistics are not communicated upfront. And, un- fortunately, the financial organization cannot escape liability just because it failed to account for the cost of generating the proper reporting. What Are the Risks? When deciding whether to offer certain hard-to-value investments, financial organizations must evaluate their compliance responsibilities and which investments they can feasibly manage. • IRS penalties: Failure to provide an accurate and timely FMV statement (IRS Form 5498, IRA Contri- bution Information) is $50 per failure. • IRS scrutiny: Financial organizations may not think of the IRS penalties alone as much of a risk. But the likelihood for increased IRS scrutiny—especially if the violations happen repeatedly or are severe—should be cause for concern. • Lawsuits: If an IRA owner is accused by the IRS of underreporting income because of undervalued assets, the IRA owner may seek legal action against the financial organization. And even if the financial organization ultimately prevails (in court, settlement, or dismissal), the financial cost can be considerable. • Reputational damage: Reputational damage may be the biggest risk. A financial organization may pay IRS penalties, survive an IRS audit, and settle (or win) any lawsuits, but the damage to the organization’s rep- utationmay be themost significant consequence of all. Financial organizations that have not determined how to meet the FMV reporting requirements on hard-to-value assets may want to rethink if holding such assets is in the organiza- tion’s best interest. n Trish Reilley has worked at Ascensus since 2004. Her work includes researching, writing, and editing a variety of topics on IRAs, HSAs, and employer-sponsored retirement plans. She has earned the CIP designation and the CISP designation. She also holds a Bachelor of Arts degree in journalism and business administration from the University of St. Thomas in St. Paul, MN. About Ascensus Ascensus is the largest independent retirement and college savings services provider in the United States, helping over 7million Americans save for the future. With more than 35 years of experience, the firm partners with financial institutions to offer tailored solutions that meet the needs of financial professionals, employers, and individuals. Ascensus specializes in recordkeeping, administrative, and program management services, supporting over 47,000 retirement plans and over 3.9million 529 college savings accounts, and a growing number of ABLE savings accounts. It also administers more than 1.6 million IRAs and health savings accounts and is home to one of the largest ERISA consulting teams in the country. For more infor- mation about Ascensus, visit www.ascensus.com . The financial organization must also be able to ascertain the FMV of an IRA investment that is distributed in- kind (i.e., a distribution of assets rather than cash). These requirements are not absolved because an investment is hard to value.