GAO Make Recommendations for IRS and the Department of Labor (DOL) in Handling Prohibited Transactions

In June 2019 The U.S. Government Accountability Office (GAO) issued a report “Formalizing Labor’s and IRS’s Collaborative Efforts Could Strengthen Oversight of Prohibited Transactions,” where they gave recommendations for the DOL and the IRS to collaborate more closely when reviewing IRA prohibited transactions, and even though solo 401k plans were not specifically mentioned, it would not be surprising if they are eventually included since the same government agencies are responsible for handling solo 401k prohibited transaction inquiries and review.

Background of DOL and IRS Involvement

The Department of Labor (DOL) has a process to grant administrative exemptions for individual retirement account (IRA) transactions that would otherwise be prohibited by law, such as an IRA buying investment property from the IRA owner.

DOL evaluates applications using statutory criteria and follows administrative procedures codified in regulations. Applications for proposed transactions that are substantially similar to certain other transactions previously granted exemptions may follow an expedited process.

Here are Some of the Findings in the GAO Report

Prohibited Transaction Exemption Applications for Individual Retirement Accounts Processed by the Department of Labor (DOL), January 1, 2006 through May 16, 2017.

Application status

Individual

EXPROa

Withdrawn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

aEXPRO 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.

  • GAO found that roughly half (56) of the IRA prohibited transaction exemption applications it reviewed were withdrawn by the applicant before the review process was completed.
  • With regard to DOL’s application review process, GAO found that DOL has not sufficiently documented internal policies and procedures to help ensure effective internal control of its process.
  • Documenting procedures could increase transparency about how applications are handled, reduce the risk of DOL employees carrying out their duties inconsistently, and provide a means to retain organizational knowledge should key personnel leave unexpectedly.
  • Although DOL and the Internal Revenue Service (IRS) share some information as part of their oversight responsibility for prohibited IRA transactions, no formal mechanism exists to help guide collaboration between the agencies.
  • Of the 124 IRA applications GAO reviewed, only eight reflected DOL contact with IRS.
  • GAO found that DOL has information about requested exemptions to prohibited IRA transaction rules that could be useful to IRS in carrying out its oversight responsibilities.
  • GAO is recommending that DOL and IRS establish a formal means—such as a memorandum of understanding or other mechanism—to collaborate on oversight of prohibited IRA transaction exemptions. GAO is also recommending that DOL document policies and procedures for managing the exemptions process. DOL and IRS generally agreed with GAO’s recommendations.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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