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

Abstract

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.

GAO found that roughly half (56) of the IRA prohibited transaction exemption applications it reviewed were withdrawn by the applicant before the review process was completed. In reviewing processed applications, GAO found that most of the prohibited transactions for which an exemption was sought involved the sale of IRA assets. 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. For example, DOL does not share information on denials — 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 agencies better support their current coordination efforts and identify additional opportunities for greater collaboration.

Keywords: retirement, pensions, ira, iras, dol, irs, gao