oversight

Individual Retirement Accounts: Formalizing Labor's and IRS's Collaborative Efforts Could Strengthen Oversight of Prohibited Transactions

Published by the Government Accountability Office on 2019-07-08.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office
             Report to the Ranking Member
             Committee on Finance
             U.S. Senate



             INDIVIDUAL
June 2019




             RETIREMENT
             ACCOUNTS

             Formalizing Labor’s
             and IRS’s Collaborative
             Efforts Could
             Strengthen Oversight of
             Prohibited Transactions




GAO-19-495
                                              June 2019

                                              INDIVIDUAL RETIREMENT ACCOUNTS
                                              Formalizing Labor’s and IRS’s Collaborative Efforts
                                              Could Strengthen Oversight of Prohibited
                                              Transactions
Highlights of GAO-19-495, a report to the
Ranking Member, Committee on Finance,
U.S. Senate




Why GAO Did This Study                        What GAO Found
IRA owners are able to invest in a wide       The Department of Labor (DOL) has a process to grant administrative
variety of assets, but they are prohibited    exemptions for individual retirement account (IRA) transactions that would
from engaging in certain transactions         otherwise be prohibited by law, such as an IRA buying investment property from
involving IRA assets. IRA owners who          the IRA owner. DOL evaluates applications using statutory criteria and follows
engage in prohibited transactions may         administrative procedures codified in regulations. Applications for proposed
incur increased income tax liability,         transactions that are substantially similar to certain other transactions previously
additional taxes, and the loss of the tax-    granted exemptions may follow an expedited process.
advantaged status of their accounts.
DOL can grant exemptions from the             Prohibited Transaction Exemption Applications for Individual Retirement Accounts Processed
prohibited transaction rules. IRS             by the Department of Labor (DOL), January 1, 2006 through May 16, 2017
enforces tax laws relating to IRAs and         Application status                                                Individual                  EXPROa
can assess additional taxes.                   Withdrawn                                                                  28                       28
GAO was asked to examine (1) DOL’s             Granted                                                                    20                       28
process for granting exemptions for            Denied                                                                     11                        5
prohibited IRA transactions and                Closed administratively or other                                            4                      n/a
outcomes of that process, and (2) the          Total                                                                      63                       61
extent to which DOL and IRS                   Source: GAO analysis of DOL data. | GAO-19-495
collaborate on oversight of prohibited        a
                                               EXPRO is the common name for a class exemption that allows DOL to authorize relief from the
transaction rules for IRAs. GAO               prohibited transactions rules on an expedited basis, generally a shorter period of time than it takes to
reviewed relevant federal laws and            review individual applications.
regulations; examined agency guidance,        As shown in the figure, GAO found that roughly half (56) of the IRA prohibited
exemption process documentation, and          transaction exemption applications it reviewed were withdrawn by the applicant
application case files; assessed              before the review process was completed. In reviewing processed applications,
interagency coordination using internal
                                              GAO found that most of the prohibited transactions for which an exemption was
control standards and prior work on
                                              sought involved the sale of IRA assets. With regard to DOL’s application review
interagency collaboration; and
interviewed DOL and IRS officials.
                                              process, GAO found that DOL has not sufficiently documented internal policies
                                              and procedures to help ensure effective internal control of its process.
What GAO Recommends                           Documenting procedures could increase transparency about how applications
                                              are handled, reduce the risk of DOL employees carrying out their duties
GAO is recommending that DOL and              inconsistently, and provide a means to retain organizational knowledge should
IRS establish a formal means—such as
                                              key personnel leave unexpectedly.
a memorandum of understanding or
other mechanism—to collaborate on             Although DOL and the Internal Revenue Service (IRS) share some information
oversight of prohibited IRA transaction       as part of their oversight responsibility for prohibited IRA transactions, no formal
exemptions. GAO is also recommending          mechanism exists to help guide collaboration between the agencies. Of the 124
that DOL document policies and                IRA applications GAO reviewed, only eight reflected DOL contact with IRS. GAO
procedures for managing the                   found that DOL has information about requested exemptions to prohibited IRA
exemptions process. DOL and IRS               transaction rules that could be useful to IRS in carrying out its oversight
generally agreed with GAO’s                   responsibilities. For example, DOL does not share information on denials—
recommendations.
                                              information that could be useful as prohibited transaction examples for IRS
                                              examiner training and educational outreach to IRA owners. In prior work on
                                              interagency collaboration, GAO has found that formal agreements, such as a
                                              memorandum of understanding, can help agencies monitor, evaluate, and
                                              update interagency collaboration. Formalizing the sharing of information between
                                              DOL and IRS regarding IRA prohibited transaction exemptions could help the
View GAO-19-495. For more information,
                                              agencies better support their current coordination efforts and identify additional
contact James R. McTigue, Jr. at (202) 512-   opportunities for greater collaboration.
9110 or mctiguej@gao.gov, or Charles A.
Jeszeck at (202) 512-7215 or
jeszeckc@gao.gov.
                                              ______________________________________ United States Government Accountability Office
Contents


Letter                                                                                    1
               Background                                                                 4
               DOL Has Not Sufficiently Documented Internal Policies and
                 Procedures for Reviewing Prohibited IRA Transaction
                 Exemption Applications                                                   6
               DOL and IRS Currently Share Some Information on Exemption
                 Applications, but More Formalized Collaboration Could Improve
                 Their Oversight Efforts                                                 13
               Conclusions                                                               15
               Recommendations for Executive Action                                      16
               Agency Comments                                                           16

Appendix I     Applications for Individual Retirement Account Exempted
               Transactions by Type                                                      19



Appendix II    Comments from the Department of Labor                                     20



Appendix III   Comments from the Internal Revenue Service                                22



Appendix IV    GAO Contact and Staff Acknowledgments                                     25


Tables
               Table 1: Prohibited Transaction Exemptions Applications for
                       Individual Retirement Accounts Processed by the
                       Department of Labor (DOL), January 1, 2006 through May
                       16, 2017                                                          10
               Table 2: Transaction Types from Individual Retirement Account
                       Prohibited Transaction Exemption Applications Processed
                       by the Department of Labor, January 1, 2006 through May
                       16, 2017                                                          19




               Page i                                GAO-19-495 Individual Retirement Account
Figure
         Figure 1: Overview of Department of Labor’s (DOL) Process for
                  Reviewing Prohibited Transaction Exemption
                  Applications                                                                     8




         Abbreviations

         DOL              Department of Labor
         EBSA             Employee Benefits Security Administration
         ERISA            Employee Retirement Income Security Act of 1974
         IRA              individual retirement account
         IRC              Internal Revenue Code
         IRS              Internal Revenue Service
         MOU              memorandum of understanding
         OED              Office of Exemption Determinations



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         Page ii                                          GAO-19-495 Individual Retirement Account
                       Letter




441 G St. N.W.
Washington, DC 20548




                       June 7, 2019

                       The Honorable Ron Wyden
                       Ranking Member
                       Committee on Finance
                       United States Senate

                       Dear Senator Wyden:

                       Individual retirement accounts (IRA) provide key tax advantages to
                       encourage individuals to save for retirement. While contributions to IRAs
                       are subject to annual dollar limits, there are few restrictions on the types
                       of investments allowable in an IRA. Many IRA owners invest in publicly
                       traded assets, such as stocks, bonds, and mutual funds. But as we have
                       previously reported, some IRA owners choose to invest in less
                       conventional or nonpublicly traded assets such as real estate, virtual
                       currency, or private equity. 1 We have also reported that IRA owners who
                       have accumulated unusually large IRA balances likely have invested in
                       unconventional assets like nonpublicly traded shares of stock and
                       partnership interests. 2

                       IRA owners who invest in unconventional assets can assume greater
                       responsibility for managing their accounts and, as a result, can be
                       exposed to heightened risks of noncompliance with complex rules
                       governing tax-favored retirement accounts. For example, although IRA
                       owners are able to invest in a wide variety of types of assets, they are not
                       permitted to engage in certain transactions involving those assets. These
                       transactions are prohibited to prevent misuse of the IRA to benefit the
                       owner in a way other than as a vehicle to save for retirement, such as
                       using an IRA to purchase a personal residence. IRA owners who engage
                       in prohibited transactions may incur increased income tax liability,
                       additional taxes, and the loss of the tax-advantaged status of their
                       account.


                       1
                        GAO, Retirement Security: Improved Guidance Could Help Account Owners Understand
                       the Risks of Investing in Unconventional Assets, GAO-17-102 (Washington, D.C.: Dec. 8,
                       2016).
                       2
                        GAO, Individual Retirement Accounts: IRS Could Bolster Enforcement on Multi-Million
                       Dollar Accounts, but More Direction from Congress is Needed, GAO-15-16 (Washington,
                       D.C.: Oct. 20, 2014).




                       Page 1                                        GAO-19-495 Individual Retirement Account
The Department of Labor (DOL) and the Internal Revenue Service (IRS)
within the Department of the Treasury each have responsibilities for
overseeing prohibited transactions relating to IRAs. DOL has primary
responsibility for interpretive guidance and exclusive authority to grant
exemptions from the prohibited transaction rules for retirement plans and
IRAs. Whereas IRS and DOL share oversight responsibilities for
employer-sponsored retirement plans such as 401(k) plans, IRS is
responsible for enforcing tax laws relating to IRAs and, among other
things, assessing additional taxes for early distributions for IRA owners
that engage in prohibited transactions. 3

You asked us to examine the challenges associated with enforcing rules
governing IRAs invested in unconventional assets. This report examines:
(1) the DOL process for granting exemptions for prohibited IRA
transactions and outcomes of that process, and (2) the extent to which
IRS and DOL collaborate on oversight for prohibited transaction rules for
IRAs. This report is part of a larger body of work on retirement security—a
key issue we have identified facing the nation. 4

To describe the process for granting exemptions for prohibited IRA
transactions, we examined relevant federal laws and regulations. We
reviewed DOL procedures and guidance for granting administrative
exemptions for certain prohibited transactions. We interviewed DOL
officials from the Employee Benefits Security Administration (EBSA)
about their prohibited transaction exemption process and procedures.
Specifically, we asked officials within EBSA’s Office of Exemption
Determinations about IRA exemption application submissions; steps and
criteria for the application approval process; and communication with
applicants and IRA owners, as well as with IRS, regarding application
decisions.

To describe the outcomes of the DOL exemption process, we reviewed
DOL’s internal Case Tracking System data on 124 IRA applications
processed over an 11-year period from January 1, 2006, to




3
 This report addresses IRAs set up by individuals. Employer-sponsored IRA plans such as
Saving Incentive Match Plans for Employees or a Simplified Employee Pension were not
included in the scope of this report.
4
    See https://www.gao.gov/key_issues/retirement_security.




Page 2                                           GAO-19-495 Individual Retirement Account
May 16, 2017. 5 To report on the types of exemptions granted, denied, or
withdrawn by applicants, we reviewed the system reference guide and
DOL’s definitions of subject codes used to categorize the IRA
transactions. We reviewed the subject codes DOL assigned to each
application and summarized the types of transactions and assets for
which applicants most often requested an exemption. To assess the
reliability of the data, we compared selected key data points to
documentation in the supporting case files, which we had requested from
DOL for this purpose. 6 We interviewed DOL officials about the reliability of
the data and discussed suspected anomalies we found. Based on our
analysis and discussions with DOL officials, we determined that the DOL
data were sufficiently reliable for the purposes of our descriptive analysis
for the period we reviewed.

To determine the extent to which IRS and DOL collaborate on oversight
for prohibited transaction rules for IRAs, we reviewed the 124 applications
for documentation of DOL coordination with IRS about the application
review or decision. We interviewed DOL officials responsible for the
exemption process about their interactions with IRS regarding prohibited
IRA transactions. We interviewed IRS officials responsible for
enforcement of prohibited transactions rules on IRAs about their use of
DOL exemption information. We assessed coordination using the relevant
Standards for Internal Control in the Federal Government and our prior
work on interagency collaboration that identifies key practices and
considerations for implementing collaborative mechanisms. 7

We conducted this performance audit from December 2016 to June 2019
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our

5
 The number of applications does not represent the numbers of individuals or IRAs
affected. For example, an application may involve multiple IRA account owners applying
for an exemption for a transaction where multiple IRA owners will be investing. DOL
reported that it processed an additional seven IRA application cases from May 17, 2017,
to December 31, 2018; we did not review the additional cases for this report.
6
 We did not conduct an independent legal analysis of the exemptions included in our
review.
7
 GAO, Managing for Results: Key Considerations for Implementing Interagency
Collaborative Mechanisms, GAO-12-1022 (Washington, D.C.: Sept. 27, 2012); and
Results-Oriented Government: Practices That Can Help Enhance and Sustain
Collaboration among Federal Agencies, GAO-06-15 (Washington, D.C.: Oct. 21, 2005).




Page 3                                          GAO-19-495 Individual Retirement Account
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives.


             IRA owners are not permitted to engage in certain prohibited transactions
Background   involving IRA assets. Prohibited transactions generally fall into two
             categories:

             •      Transaction involving disqualified persons. An IRA is prohibited
                    from engaging in a transaction with disqualified persons, such as
                    members of the IRA owner’s family or an IRA fiduciary. 8
             •      Transaction involving self-dealing. An IRA owner who is a fiduciary
                    is prohibited from engaging in a transaction with the IRA where the
                    IRA owner personally benefits (other than through the receipt of a
                    distribution). 9

             We previously reported that prohibited transactions are more likely to
             arise when IRA owners make unconventional IRA investments. 10 Unlike
             conventional IRA investments in publicly traded stocks, bonds, and
             mutual funds, unconventional investments in real estate, virtual currency,
             or private equity are more likely to involve the IRA owner, disqualified
             family members, or other disqualified persons. For example, an IRA
             invested in rental real estate can leave IRA owners susceptible to a
             number of prohibited transactions, such as renting to family or paying for
             repairs with personal funds.

             IRA owners may face adverse and potentially severe tax consequences if
             they are found to have engaged in a prohibited transaction. Specifically,
             the IRA could lose its tax-favored status. The account would then be
             treated as distributing all its assets to the IRA owner at the fair market
             value on the first day of the year in which the prohibited transaction

             8
              See 26 U.S.C. § 4975(c)(1)(A)-(D) & (e)(2) and 29 U.S.C. § 1106(a). A fiduciary is
             anyone who exercises discretionary authority or discretionary control in managing an IRA
             or exercises any authority or control in managing or disposing of its assets; renders
             investment advice to an IRA for a fee or has the responsibility to do so; and has any
             discretionary authority or discretionary responsibility in administering an IRA. See
             26 U.S.C. § 4975(e)(3).
             9
                 See 26 U.S.C. § 4975(c)(1)(E)-(F) & (d)(9) and 29 U.S.C. § 1106(b).
             10
                  GAO-17-102.




             Page 4                                             GAO-19-495 Individual Retirement Account
occurred. 11 The IRA owner may be subject to additional income taxes
because of any early distribution from an IRA. 12 The prohibited
transaction may also be subject to excise taxes. 13

The Employee Retirement Income Security Act of 1974 (ERISA), which
established IRAs and rules prohibiting certain IRA transactions, assigned
IRA oversight roles to both DOL and IRS. 14 To avoid confusion over dual
jurisdiction, a 1978 Executive Order further clarified the agencies’ roles
and responsibilities regarding prohibited transactions. 15 As a result, the
authority to interpret the prohibited transaction rules and grant
exemptions to those rules was transferred to DOL. The transfer did not
affect IRS’ ability to enforce the excise tax provisions or the tax
consequences for IRA owners who are found to have engaged in a
prohibited transaction. However, in enforcing such tax consequences,
IRS is bound by the regulations, rulings, opinions, and exemptions issued
by DOL.

DOL has the authority to grant administrative exemptions to the prohibited
transaction rules on either an individual or a class basis. 16 DOL can grant
prospective exemptions for a transaction that an IRA is considering, as
well as retroactive exemptions for transactions that have already
occurred.

11
     See 26 U.S.C. § 408(e)(2)(B).
12
     See 26 U.S.C. § 72(t).
13
  If a disqualified person other than the IRA owner or beneficiary engages in a prohibited
transaction, that person may be liable for a 15 percent excise tax on the amount involved
in the prohibited transaction and a 100 percent additional tax if the transaction is not
corrected within the taxable period. See 26 U.S.C. § 4975(a). If the IRA ceases to be an
IRA as a result of the prohibited transaction, the IRA owner or beneficiary is not subject to
the excise tax. See 26 U.S.C. § 4975(c)(3).
14
  See Pub. L. No. 93-406, 88 Stat. 829. ERISA includes provisions related to prohibited
IRA transactions in Titles I and II. The Title II provisions are found in the Internal Revenue
Code (IRC). Throughout this report, we generally refer to the prohibited transaction rules
writ large (inclusive of the provisions in both ERISA and the IRC), unless otherwise clear
from context.
15
   See Reorganization Plan No. 4 of 1978, available at
https://www.govinfo.gov/content/pkg/USCODE-2010-title5/pdf/USCODE-2010-title5-app-
reorganiz-other-dup102.pdf. Accessed April 2, 2019.
16
  Class exemptions provide relief from the prohibited transaction rules to an identified
class of entities or individuals who engage in the transaction(s) described in the exemption
and who satisfy its conditions.




Page 5                                             GAO-19-495 Individual Retirement Account
                           To grant an exemption from prohibited IRA transaction rules, DOL
DOL Has Not                evaluates applications using statutory criteria, and follows administrative
Sufficiently               procedures codified in regulations. Generally, DOL may not grant an
                           exemption unless it finds the exemption to be:
Documented Internal
Policies and               •      administratively feasible,
Procedures for             •      in the interest of the plan and its participants and beneficiaries, and
Reviewing Prohibited       •      protective of the rights of plan participants and beneficiaries. 17

IRA Transaction
                           Before granting an exemption, DOL generally must publish a notice of
Exemption                  proposed exemption in the Federal Register inviting interested parties to
Applications               comment on the proposed exemption. 18


DOL Has a Process to       DOL regulations lay out the process for filing and processing prohibited
Grant Administrative       transaction exemptions applications. 19 Among other things, the
Exemptions for Otherwise   regulations explain:
Prohibited IRA             •      who may apply,
Transactions
                           •      what information must be included with an application, 20
                           •      when a conference with DOL can be requested,
                           •      when a request for reconsideration of a DOL decision can be made,
                                  and
                           •      how DOL and the applicant will notify interested persons if DOL
                                  decides a tentative approval is warranted.

                           DOL also publishes a booklet that provides an explanation of the
                           regulations and applicable laws, and includes additional information for
                           applicants like examples of common types of exemption requests. 21

                           17
                                See 26 U.S.C. § 4975(c)(2)(A)-(C) and 29 U.S.C. § 1108(a)(1)-(3).
                           18
                                See 29 C.F.R. § 2570.42.
                           19
                                See 29 C.F.R. §§ 2570.30 through 2570.52.
                           20
                             See 29 C.F.R. § 2570.34. Among other things, applications must include a detailed
                           description of the exemption transaction, the reason the IRA would have for entering into
                           the exemption transaction, and a statement explaining why the transaction meets the
                           criteria in 26 U.S.C. § 4975(c)(2).




                           Page 6                                             GAO-19-495 Individual Retirement Account
IRA owners or their fiduciaries file applications for exemptions with DOL’s
Office of Exemption Determinations which is part of EBSA. Applicants can
research information about past exemptions granted by the agency on
EBSA’s website. 22 As explained in the DOL booklet describing the
application requirements, applicants have the burden of demonstrating
that they should be granted an exemption.

If DOL tentatively denies an application, applicants have options for
requesting that the denial be reconsidered. Within 20 days of the tentative
denial, applicants can request a conference with DOL, or notify DOL of
their intent to submit additional information. 23 If, after a conference has
been convened, DOL issues a final denial of the application, DOL will
entertain one request for reconsideration if the applicant presents
significant new facts or arguments, which, for good reason, could not
have been submitted earlier. 24

After DOL publishes a notice of proposed exemption in the Federal
Register that describes the pending application, the applicant must notify
interested persons of the pending exemption. 25 Often, the contents of the
information sent to all interested persons, the manner in which it is sent,
and any associated deadlines will have previously been agreed to by
DOL and the applicant. DOL may also hold public hearings during the
comment period. For example, if the transaction involves potential
fiduciary self-dealing or conflicts of interest, any individual potentially
adversely affected by the exemption may submit a request for a public
hearing to DOL. 26 If granted, DOL publishes information about the
exemption in the Federal Register and on its website. Figure 1 provides
an overview of the exemption application process.
21
  DOL, Exemption Procedures Under Federal Pension Law. Available at
https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-
center/publications/exemption-procedures-under-federal-pension-law.pdf. Accessed April
8, 2019.
22
  See
https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/exemptions/individu
al. Accessed on August 21, 2018.
23
     See 29 C.F.R. § 2570.38.
24
 See 29 C.F.R. § 2570.45. The applicant must explain why these new facts or arguments
could not have been submitted for the agency’s consideration during its initial review.
25
     See 29 C.F.R. § 2570.43.
26
     See 29 C.F.R. § 2570.46.




Page 7                                         GAO-19-495 Individual Retirement Account
Figure 1: Overview of Department of Labor’s (DOL) Process for Reviewing Prohibited Transaction Exemption Applications




                                        Note: The figure provides a general overview of the DOL process for reviewing applications under
                                        DOL regulations codified at 29 C.F.R. part 2570. Under certain circumstances, DOL may issue a final
                                        denial letter for a proposed exemption it had tentatively approved. An applicant can withdraw an
                                        application prior to final denial or approval; DOL closes withdrawn cases as “withdraw by applicant”
                                        and sends the applicant a written acknowledgement.




                                        The regulations describe circumstances in which DOL will ordinarily not
                                        consider an application. 27 For example, DOL generally will not consider
                                        an individual application if DOL already has under consideration a class

                                        27
                                          See 29 C.F.R. § 2570.33.




                                        Page 8                                                GAO-19-495 Individual Retirement Account
exemption relating to the same type of transaction. DOL will also not
consider an application for transactions subject to DOL or IRS
investigations. DOL requires applicants to disclose in their applications
whether exemption transactions are, or have been, subject to an
investigation or enforcement action by DOL or IRS. In addition, if the
applicant or any other party in interest becomes the subject of an
investigation or enforcement action, the applicant is required to promptly
notify DOL. 28

If applicants find that their prospective transaction is substantially similar
to other transactions for which the agency has previously granted
exemptions, they can follow an expedited process by submitting an
“EXPRO” application. 29 EXPRO applications are required to cite prior
exemptions granted by DOL to demonstrate that the proposed IRA
transaction is substantially similar to other IRA transactions for which
DOL has previously provided an exemption. Specifically, EXPRO
applicants must cite as substantially similar, either (1) two individual
exemptions granted by DOL within the previous 5 years, or (2) one
individual exemption granted within the past 10 years, and one
transaction authorized pursuant to the EXPRO class exemption within the
past 5 years. The applicant must give notice to all interested persons, and
the applicant must resolve all substantive adverse comments provided by
interested persons before DOL will grant final approval.

The time to complete the exemption process can range from a few
months to more than a year. DOL officials told us that the process
generally takes about 1 year for an individual IRA application that is
relatively simple or routine. EXPRO applications have been processed in
as few as 78 days. According to DOL officials, the process can start
before an applicant submits a formal application because applicants can,
and do, request informal consultations and conferences with DOL. DOL
officials explained that sometimes potential applicants decide not to file
an application after an informal conference because applicants realize
that their application would likely be denied.

28
     See 29 C.F.R. § 2570.37(b).
29
  EXPRO is the common name for a class exemption that was created by DOL in 1996
(PTE 96-62) “that allows DOL to authorize relief from the prohibited transaction rules on
an expedited basis.” EXPRO applications are granted an “authorization” under class
exemption rules. For purposes of this report, unless otherwise clear from context we
generally use the term “exemption” to refer to both individual exemptions and EXPRO
“authorizations.”




Page 9                                           GAO-19-495 Individual Retirement Account
DOL officials explained that during the review process, they first confirm
their understanding and characterization of the proposed exemption
through correspondence with the applicants. Then, in response, DOL
often sets conditions under which relief from the prohibited transaction
rules is contingent, such as on the applicant taking additional actions and
remaining in compliance with those conditions. For example, if an
applicant wants to sell or purchase an asset in what would be an
otherwise prohibited IRA transaction, DOL may stipulate that the
applicant first obtain an independent appraisal or valuation assessment to
determine a fair-market value of that asset.

After applications are formally submitted, many IRA applicants withdraw
during DOL’s review process. Over an 11-year period, we found that of
the 124 IRA applications, applicants withdrew roughly half (56) before the
review process was completed (see table 1). Of the remaining 68
applications that continued with the review process, DOL granted 48,
denied 16, and closed four application cases for administrative or other
reasons. 30 DOL officials did not dispute the results of our analysis, but
they said that it would be misleading to conclude that DOL is more likely
to grant than deny applications. Rather, they said that their practice of
encouraging applicants to consult with DOL in advance leads some
potential applicants to decide not to pursue an exemption.

Table 1: Prohibited Transaction Exemptions Applications for Individual Retirement
Accounts Processed by the Department of Labor (DOL), January 1, 2006 through
May 16, 2017
                                                                                                       a
    Application outcome                                           Individual                  EXPRO
    Withdrawn                                                               28                       28
    Granted                                                                 20                       28
    Denied                                                                  11                         5
    Closed administratively or other                                         4                      n/a
    Total                                                                   63                       61
Source: GAO analysis of DOL data. | GAO-19-495
a
 EXPRO is the common name for a class exemption that allows DOL to authorize relief from the
prohibited transactions rules on an expedited basis, generally a shorter period of time than it takes to
review individual applications.




30
  Applications closed for administrative reasons can include those that do not accurately
identify the plan under review, among other reasons.




Page 10                                                 GAO-19-495 Individual Retirement Account
                             In our review of processed applications, we found that most of the
                             applications involved the sale of IRA assets. We found that 88 of the 124
                             applications were for transactions involving the sale of IRA assets. Most
                             of these were sales of securities or real property (see appendix I for
                             additional information). The next most common type of transaction was
                             for the purchase of assets (21 applications), and most of those also
                             involved securities or real property. The remaining applications involved
                             other transactions, including leases, loans, and extensions of credit.


DOL Lacks Documented         DOL has not sufficiently documented internal policies and procedures to
Policies and Procedures to   manage and help ensure effective internal controls of its prohibited
                             transactions exemption process. While DOL regulations and guidance
Manage Its Reviews and
                             detail the requirements for applicants, DOL generally lacks internal
Data                         documentation of the steps and actions DOL officials are to follow when
                             processing applications, and the roles and responsibilities of agency
                             officials.

                             DOL officials told us that they use a case tracking system to record and
                             track applications. When an application is received by DOL, the division
                             chief of EBSA’s Office of Exemption Determinations (OED) reviews the
                             application and assigns it to an OED supervisor. Either the division chief
                             or the supervisor enters preliminary information from the application into
                             the system, and classifies the transaction by applying one or multiple
                             subject matter codes. The supervisor then reviews the information in the
                             applicant’s case file and assigns the case to an OED analyst. DOL
                             officials told us that any interim data, such as the publication date for a
                             proposed exemption, is entered by the supervisor in the system. If an
                             application is withdrawn by an applicant, denied, or granted, the
                             supervisor records this information in the system, including the dates of
                             these actions. When a case is closed, the analyst completes a close-out
                             index form and submits it to the supervisor for review, and the supervisor
                             enters a closing code in the system. DOL officials told us that they can
                             use the system to generate management reports, such as on the number
                             of applications filed and the amount of time to process cases.

                             Neither the process described above, nor the different roles and
                             responsibilities of the OED division chief, supervisors, and analysts in that
                             process, were documented in the internal documents that DOL provided.
                             A system reference guide included instructions to system users for how to
                             input and modify case records, generate reports, and add or modify
                             users. The reference guide also included screen prints indicating which
                             fields are required by the system to process a case. However, the


                             Page 11                                  GAO-19-495 Individual Retirement Account
reference guide did not contain information about responsibilities and
duties for these data entry activities, and how those duties are assigned.
The documentation provided is unclear regarding who within OED is
ultimately responsible for making final decisions on applications.

According to Standards for Internal Control in the Federal Government,
documentation of an agency’s policies and procedures is a necessary
part of an effective internal control system. 31 Such documentation can
appear, for example, in management directives or operating manuals,
and it should be readily available for examination. Policies and
procedures can also help document internal control responsibilities within
the agency.

DOL officials told us that OED is a small and compact organization, and
as such, its policies and procedures can easily be communicated “person
to person” and through onsite training. DOL officials also said that the
process for entering data is not difficult, and there are few opportunities
for error because nearly all data on applications is prepopulated.

The principles of internal control, however, apply to both large and small
organizations. The level and nature of documentation may vary based on
the size of the organization and the complexity of the processes the
organization performs, but documentation is still necessary. By
documenting policies and procedures, management will be better
positioned to monitor whether the organization’s activities are aligned with
those policies and procedures, and assess whether the organization is
achieving its objectives. Documenting procedures also would provide
greater transparency about how applications are handled, and can reduce
the risk of employees carrying out their duties inconsistently. For a small
organization like OED, documentation of policies and procedures
provides a means to retain organizational knowledge, and can help
ensure continuity of and consistency in operations if key personnel leave
the organization unexpectedly.




31
 See GAO, Standards for Internal Control in the Federal Government, GAO-14-704G
(Washington, D.C.: September 2014).




Page 12                                     GAO-19-495 Individual Retirement Account
                      Some information sharing takes place between DOL and IRS on
DOL and IRS           applications for IRA prohibited transaction exemptions, but no formal
Currently Share       mechanism exists to help guide collaboration between the two agencies.
                      As previously discussed, DOL and IRS share oversight responsibility for
Some Information on   prohibited IRA transactions. Based on our review of applications and DOL
Exemption             data as well as interviews with agency officials, we found that interactions
                      between DOL and IRS regarding applications for prohibited transaction
Applications, but     exemptions are infrequent and limited in scope. Of the 124 applications
More Formalized       we reviewed, only eight were coded in OED’s Case Tracking System as
                      having “external contact with IRS,” and DOL officials confirmed that this
Collaboration Could   accurately reflects the level of interagency coordination. 32 DOL officials
Improve Their         stated that they sometimes contact IRS about exemption applications,
                      and IRS officials confirmed to us that they periodically receive
Oversight Efforts     communications from DOL. IRS officials also told us that they
                      occasionally contact DOL.

                      Both agencies described to us how their current interaction occurs. DOL
                      officials told us that they coordinate with IRS in the following ways:

                      •      If, during the application review process, OED staff identify
                             applications that may warrant further review or investigation for tax
                             violations, they refer the case to EBSA’s Office of Enforcement, which
                             may then coordinate or refer the case to IRS.
                      •      DOL officials said that OED staff review the IRS “Dirty Dozen” list of
                             potentially abusive tax scams and schemes. 33
                      IRS officials said that when possible prohibited transactions arise during
                      an examination that might require DOL input, IRS examiners reach out to
                      DOL to ensure that IRS understands DOL decisions on those
                      transactions. 34

                      DOL officials said that, in their view, most requested prohibited IRA
                      transaction exemptions do not require extensive interaction with IRS.
                      They questioned the potential usefulness of information about denied or


                      32
                       DOL’s reference guide describes using the “external contact with IRS” code in situations
                      where OED staff consulted with IRS representatives.
                      33
                         The list is published annually by IRS and identifies any emerging tax schemes and
                      scams for IRS and the public, https://www.irs.gov/newsroom/dirty-dozen.
                      34
                           GAO-15-16.




                      Page 13                                         GAO-19-495 Individual Retirement Account
withdrawn applications that might be shared with IRS, but said that IRS
could certainly obtain this information if IRS requested it.

IRS officials, however, told us that more information from DOL about
prohibited IRA transactions and requested exemptions could be useful in
carrying out IRS’s oversight responsibilities. For example, DOL does not
share information on denied or withdrawn applications with IRS,
information that IRS officials told us would be helpful to them. We found
that denial information could be useful to IRS as illustrative examples of
prohibited transactions for examiner training and educational outreach to
IRA owners. 35 Information about the types of transactions in withdrawn
applications could also help IRS identify emerging issues or trends in
potential prohibited transactions marketed to IRA owners.

Although some limited collaboration between DOL and IRS exists, the
agencies have not applied to their oversight of prohibited transactions
some key practices we have identified in prior reviews of interagency
collaboration. 36 Specifically, developing a mechanism to formalize the
sharing of information between DOL and IRS could help support current
collaboration activities, and could be useful in helping the agencies
identify opportunities for greater collaboration going forward. Furthermore,
documentation is a necessary part of an effective internal control
system. 37 Documenting the procedures for interagency collaboration
would improve internal control over the agencies’ activities. A formal
agreement, such as a memorandum of understanding (MOU) or other
mechanism, can further help agencies monitor, evaluate, and update
interagency collaboration.

For example, DOL and IRS have previously formalized their collaboration
regarding oversight of a different type of retirement savings vehicle—
employer-sponsored retirement plans. DOL and IRS have oversight
responsibilities for employer-sponsored retirement plans, such as
pensions, and in 2003, DOL and IRS completed an MOU to implement
collaboration between the two agencies with regards to investigations of

35
  In GAO-15-16, we recommended that IRS identify options to provide outreach targeting
taxpayers with nonpublic IRA assets and their custodians. IRS has taken some action to
provide general outreach but had no plans as of February 2019 to target outreach to
taxpayers with nonmarketable IRA assets at greater risk of noncompliance.
36
     GAO-12-1022.
37
     GAO-14-704G.




Page 14                                        GAO-19-495 Individual Retirement Account
              and litigation involving employer-sponsored retirement plans. 38 The
              employer retirement plan MOU and the implementing guidance contain
              some features of interagency collaboration mechanisms that we have
              identified in prior work. For example:

              •    The responsibilities of each agency are documented, and responsible
                   agency components and officials are identified.
              •    The agencies use collaboration tools (checklists) for determining
                   whether issues presented in an examination or investigation by one
                   agency should be referred to the other.
              •    A system and process exists to track referrals, and the agencies
                   reconcile their data about referrals (including pending referrals)
                   quarterly.
              The employer retirement plan MOU also established a process to
              periodically monitor its effectiveness, and the MOU was last updated in
              2013. Developing a similar mechanism to formalize the sharing of
              information between DOL and IRS regarding IRA prohibited transaction
              exemptions could help the agencies better support their current
              coordination efforts and identify additional opportunities for greater
              collaboration.


              IRAs are a key vehicle for individuals to save for retirement. IRA owners’
Conclusions   decisions to invest in unconventional assets can expand their role and
              responsibilities substantially. The consequences for account owners who
              make a mistake can be severe.

              When IRA owners request an exemption from rules on prohibited
              transactions, DOL evaluates applications using statutory criteria, and
              follows administrative procedures codified in regulations. However, DOL
              has not sufficiently documented internal policies and procedures for how
              to manage its process for granting exemptions. Such documentation is a
              necessary part of an agency’s effective internal control system.

              DOL and IRS share oversight responsibility of prohibited IRA
              transactions. While the two agencies do share some information, they do

              38
                EBSA Enforcement Manual, Chapter 12, Memorandum Of Understanding, Internal
              Revenue Service/Department of Labor Coordination Agreement, June 3, 2003. Available
              at: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/enforcement/oe-
              manual/chapter-12. Accessed December 11, 2018.




              Page 15                                      GAO-19-495 Individual Retirement Account
                      not have a formal mechanism to guide and monitor their collaboration. By
                      formalizing interagency collaboration, such as through an MOU or other
                      mechanism, DOL and IRS could help reinforce their current information
                      sharing and potentially identify new opportunities to improve their
                      oversight efforts through greater collaboration. Documenting procedures
                      for DOL and IRS collaboration on prohibited IRA transactions would also
                      help introduce better internal control over these activities.


                      We are making a total of three recommendations, including two to DOL
Recommendations for   and one to IRS.
Executive Action
                      The Secretary of Labor should document internal policies and procedures
                      for managing the IRA prohibited transaction exemption process.
                      (Recommendation 1)

                      The Secretary of Labor, in consultation with the Commissioner of Internal
                      Revenue, should establish a formal means, such as a memorandum of
                      understanding or other mechanism, to support and guide DOL’s and
                      IRS’s collaborative efforts to oversee IRA prohibited transaction
                      exemptions. (Recommendation 2)

                      The Commissioner of Internal Revenue, in consultation with the Secretary
                      of Labor, should establish a formal means, such as a memorandum of
                      understanding or other mechanism, to support and guide DOL’s and
                      IRS’s collaborative efforts to oversee IRA prohibited transaction
                      exemptions. (Recommendation 3)


                      We provided a draft of this report to the Secretary of Labor, the
Agency Comments       Commissioner of Internal Revenue, and the Secretary of the Treasury for
                      review and comment.

                      In its comments, reproduced in appendix II, DOL generally agreed with
                      our two recommendations directed to it. For recommendation 1, DOL
                      plans to create an internal procedure manual formalizing OED’s
                      administrative case processing procedures to help in passing along
                      institutional knowledge. For recommendation 2, DOL agreed to
                      periodically discuss all IRA exemption cases with IRS and did not
                      elaborate on the formal means for this information sharing. DOL also
                      provided technical comments which we incorporated as appropriate.




                      Page 16                                GAO-19-495 Individual Retirement Account
In its comments, reproduced in appendix III, IRS generally agreed with
our recommendation directed to it. For recommendation 3, IRS said it is
committed to discussing an appropriate mechanism, including periodic
meetings, to formalize collaboration on IRA prohibited transaction
exemptions. IRS plans to consider expanding its formal collaboration with
DOL as part of the next periodic update of the existing employer plan
MOU. IRS also provided technical comments which we incorporated as
appropriate.

The Department of the Treasury provided technical comments which we
incorporated as appropriate.


As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
report date. At that time, we will send copies to the appropriate
congressional committees, the Secretary of Labor, the Secretary of the
Treasury, and the Commissioner of Internal Revenue. In addition, the
report will be available at no charge on the GAO website at
http://www.gao.gov.




Page 17                                  GAO-19-495 Individual Retirement Account
If you or your staff have any questions about this report, please contact
James R. McTigue, Jr. at (202) 512-9110 or Charles A. Jeszeck at
(202) 512-7215. You may also reach us by email at mctiguej@gao.gov or
jeszeckc@gao.gov. GAO staff making key contributions to this report are
listed in appendix IV.

Sincerely yours,




James R. McTigue, Jr.
Director, Tax Issues
Strategic Issues




Charles A. Jeszeck
Director, Education, Workforce,
and Income Security




Page 18                                GAO-19-495 Individual Retirement Account
Appendix I: Applications for Individual
             Appendix I: Applications for Individual
             Retirement Account Exempted Transactions
             by Type


Retirement Account Exempted Transactions
by Type
             Table 2: Transaction Types from Individual Retirement Account Prohibited
             Transaction Exemption Applications Processed by the Department of Labor,
             January 1, 2006 through May 16, 2017
                                                                                                                    a
                 Transaction type                                                 Individual               EXPRO
                 Sale of…
                     securities                                                             17                    25
                     real property                                                           9                    17
                     partnership or limited liability company                                8                    10
                     interest
                     other assets                                                            1                      1
                          Subtotal                                                          35                    53
                 Purchase of…
                     securities                                                              5                      4
                     real property                                                           3                      2
                     partnership or limited liability company                                5                      0
                     interest
                     other assets                                                            2                      0
                          Subtotal                                                          15                      6
                 Loan (secured by)…
                     real property                                                           3                      0
                     personal property                                                       1                      0
                     other assets                                                            2                      0
                          Subtotal                                                           6                      0
                 Lease of…
                     real property                                                           0                      1
                     personal property or other assets                                       2                      0
                          Subtotal                                                           2                      1
                 Extension of credit by plan                                                 4                      1
                 Other transaction(s)                                                        1                      0
                 Total                                                                      63                    61
             Source: GAO analysis of DOL data. | GAO-19-495

             Note: We reviewed transaction subject matter codes the Department of Labor (DOL) assigned to
             each application processed during the review period. We grouped some transactions under codes
             with clearer descriptions that DOL more commonly uses. In some cases, we consolidated several
             similar transaction subject codes under one of the more common subject matter codes identified. We
             did not conduct an independent legal analysis of the exemptions included in our review.
             a
              EXPRO is the common name for a class exemption that allows DOL to authorize relief from the
             prohibited transactions rules on an expedited basis, generally a shorter period of time than it takes to
             review individual applications.




             Page 19                                                 GAO-19-495 Individual Retirement Account
Appendix II: Comments from the Department
             Appendix II: Comments from the Department
             of Labor



of Labor




             Page 20                                     GAO-19-495 Individual Retirement Account
Appendix II: Comments from the Department
of Labor




Page 21                                     GAO-19-495 Individual Retirement Account
Appendix III: Comments from the Internal
              Appendix III: Comments from the Internal
              Revenue Service



Revenue Service




              Page 22                                    GAO-19-495 Individual Retirement Account
Appendix III: Comments from the Internal
Revenue Service




Page 23                                    GAO-19-495 Individual Retirement Account
Appendix III: Comments from the Internal
Revenue Service




Page 24                                    GAO-19-495 Individual Retirement Account
Appendix IV: GAO Contact and Staff
                  Appendix IV: GAO Contact and Staff
                  Acknowledgments



Acknowledgments


                  James R. McTigue, Jr., Director, Tax Issues, Strategic Issues, (202) 512-
GAO Contacts      9110 or mctiguej@gao.gov

                  Charles A. Jeszeck, Director, Education, Workforce, and Income Security
                  Issues, (202) 512-7215 or jeszeckc@gao.gov


                  In addition to the contacts named above, MaryLynn Sergent and David
Staff             Lehrer (Assistant Directors), Ted Burik, Susan Chin, Steven Flint, Emily
Acknowledgments   Gruenwald, Mark Kehoe, Jungjin Park, and David Reed made key
                  contributions to this report. James Bennett, Amy Bowser, Jacqueline
                  Chapin, Edward J. Nannenhorn, Andrew J. Stephens, Walter Vance, and
                  Adam Wendel also provided support.




(103139)
                  Page 25                                GAO-19-495 Individual Retirement Account
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