Why IRA Holders Need to Scrutinize IRS Form 5498

Every year, your IRA provider reports on your IRA to the IRS. Providers do this with two tiny but powerful tax forms, IRS Forms 1099-R and 5498. A mistake on one of these forms could cost you money or lead to a needless IRS audit. There are tens of millions of IRA accounts in the U.S., so there are going to be some reporting mistakes. Head off problems by eyeballing those forms carefully when you receive them, and if you find mistakes, getting them corrected. Moreover, know what every number and code on those forms means, so you can be sure your tax preparer correctly transfers the info onto your tax return.

Let's dig into Form 5498. The IRA provider must file this form every year for every IRA it manages. The form reports the prior year-end fair market value of the IRA, whether any contribution was made to the account for the prior year, and (in some cases) whether a minimum distribution is required from the account for the current year.

Form 5498 is due by the end of May for the prior year. So the 5498 for 2017 will be due May 31, 2018. Some IRA providers file these right after the end of the year, while some wait until May.

It's important that you review this form and make sure the IRA provider got it right and correctly reported everything to the IRS. Ideally you would get a draft in advance so you could check it before it gets filed, but that never happens. The best you can hope for, if you discover a mistake, is either to get the IRA provider to file a corrected form or (if it affects your income tax return) attach a statement to your return explaining the discrepancy. The trouble is, Form 5498 may not arrive until after you've already filed your tax return.

The major of piece of information to review on Form 5498 is the prior year-end "fair market value" of the account (Box 5). If you are subject to taking required minimum distributions (either because you are over 70 1/2, or because this is an inherited IRA), this is the value the IRS would look at first to figure out whether you took your full RMD. Compare the number in Box 5 with your own records regarding the correct prior year-end value of your IRA. Is the number the IRA provider has reported the same number you used to compute your RMD?

If your IRA holds "hard to value" assets like a hedge fund, promissory note, or parcel of real estate, the IRS gets special notification of this fact. In Box 15a, the IRA provider must report the fair market value of seven categories of "specified assets." Then in Box 15b, the IRA provider enters Codes A through G for the type of specified assets your IRA owns: stock not readily tradable on an established securities exchange; nontraded debt instruments; ownership in an LLC or other private (non-traded) entity; real estate; ownership in a nontraded partnership, trust or similar entity; option contracts that are not publically traded; and any "other asset that does not have a readily available FMV." If you have more than two separate types of such nontraded assets, the IRA provider just enters Code H.

If you have such investments in your IRA, you should proactively work with your IRA provider to make sure it has the correct codes and current valuations for those investments.

IRA providers have always been required to report the FMV of their IRAs annually, but until recently the IRS didn't seem to care much about this requirement. But lately the IRS has developed a keen interest in the subject of nonpublicly traded assets held in IRAs, and it is presumably heading for tougher enforcement. Not only has the IRS added the new information boxes 15a and 15b to deal with these assets, but it has started including a reminder to IRA providers that they are "responsible for ensuring that all IRA assets (including those not traded on established markets or with otherwise readily determinable market value) are valued annually at their fair market value."

The most confusing thing about Form 5498 is Box 11, "Check if RMD for 2018." The IRA provider is supposed to check this box if the IRA is owned by the original participant and he or she will be age 70 1/2 or older in 2018. Here's why this is confusing. First, it looks forward to the coming year--2018--while the rest of the form looks backward, reporting events and values from 2017. Second, if you will be reaching age 70 1/2 in 2018, you are not actually required to take the RMD for that year in 2018--you have the right to postpone it until as late as April 1, 2019. But the IRA provider is still supposed to check Box 11 on your 2017 Form 5498. Third, Box 11 does not apply to inherited IRAs at all. So if you are a beneficiary, holding an inherited IRA, you might get the impression (when you receive your Form 5498) that there is no RMD required for 2018 because this box is not checked. How are you supposed to know that box doesn't apply to inherited IRAs, even when an RMD is required?

The parts of the form most likely to attract errors are the "contributions" boxes (Boxes 1 through 4). The IRA provider is supposed to report here only "regular" and "rollover" contributions to the IRA made during the prior year. An IRA-to-IRA transfer is not a "contribution"--it is neither a rollover nor a regular contribution. So IRA-to-IRA transfers are not reportable on Form 5498, but some IRA providers do report them there, erroneously. To head off such mistakes, it may help (when you are requesting an IRA-to-IRA transfer) to remind the IRA provider that the transfer is not reportable as a distribution from the transferor IRA or as a contribution to the transferee IRA.

Last but not least, there’s something new on this year's Form 5498. Remember back in 2016 the IRS issued Rev. Proc. 2016-47, allowing IRA owners to "self-certify" their own hardship waivers of the 60-day rollover deadline in some situations? If you made a self-certified late rollover contribution to your IRA in 2017, the IRA provider is going to tell the IRS about it on Form 5498. The IRA provider enters the amount of the late rollover contribution in Box 13a, then enters code "SC" (for self-certified) in Box 13c. So be prepared to justify that self-certified late rollover in case of IRS audit.

Advisors, be sure your clients deliver to you every copy of Form 5498 they ever receive in the mail. This will help you (1) figure out whether you really do know about the existence of every IRA your client has; (2) verify that the IRA provider has completed the form correctly (see above); and (3) steer the client toward awareness of the importance of tracking IRA paperwork.

Where to read more: The statements above are based on the IRS's 2017 Instructions for Forms 1099-R and 5498. You can download these instructions and Form 5498 itself at www.irs.gov. From those instructions: Page 18, "Do not report on Form 5498 a trustee-to-trustee transfer from (a) a traditional IRA...to another traditional IRA ..." Page 18, regarding RMD reporting: "Until further guidance is issued, no reporting is required for IRAs of deceased participants ..." Regarding self-certified hardship waivers of the 60-day rollover deadline, see IRS Revenue Procedure 2016-47, 2016-37 IRB, discussed in this column; and the Form 5498 Instructions for Boxes 13a and 13c, p. 22.

Natalie Choate will be speaking in Orlando, Florida (Jan. 25-26); Chicago (April 30); Wilmington, Delaware (May 9); Bethlehem, Pennsylvania (May 10); or Waltham, Massachusetts (June 1). See all of Natalie's upcoming speaking events at ataxplan.com/seminars/schedule.cfm.