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GAO: Formalize IRS and DOL Collaboration on IRA PTEs

The IRS and the Department of Labor should establish a formal way of collaborating on oversight of prohibited IRA transaction exemptions, the Government Accountability Office (GAO) has recommended.

The GAO undertook the study that led to its report, “Individual Retirement Accounts: Formalizing Labor’s and IRS’s Collaborative Efforts Could Strengthen Oversight of Prohibited Transactions,” at the request of Sen. Ron Wyden (D-OR), ranking member of the Senate Finance Committee. Wyden asked the GAO to examine the challenges associated with enforcing rules governing IRAs invested in unconventional assets.

This report, which the GAO says is “part of a larger body of work on retirement security — a key issue we have identified facing the nation,” 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.

In the course of the study, the GAO reviewed relevant federal laws and regulations; examined agency guidance, exemption process documentation, and application case files; assessed interagency coordination using internal control standards and prior work on interagency collaboration; and interviewed DOL and IRS officials.

The Report

The GAO outlines the role that the IRS, DOL and IRA owners play regarding IRA transactions.

The IRS enforces tax laws relating to IRAs and can assess additional taxes; the DOL can grant exemptions from the prohibited transaction rules. The 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.

IRA owners can invest in a wide variety of assets, but they cannot engage in certain transactions involving IRA assets, such as an IRA buying investment property from the IRA owner. 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 accounts.

IRA owners’ decisions to invest in unconventional assets can expand their role and responsibilities substantially, the GAO says, and it warns that the consequences can be severe for account owners who make a mistake with transactions concerning IRAs. The GAO found that most of the prohibited transactions for which an exemption was sought involved the sale of IRA assets.

When IRA owners request such an exemption, the DOL evaluates applications using statutory criteria, and follows administrative procedures codified in regulations. However, the GAO says that in its opinion, the DOL “has not sufficiently documented internal policies and procedures for how to manage its process for granting exemptions.” Such documentation, it says, “is a necessary part of an agency’s effective internal control system.”

The GAO notes that while the DOL could improve the way it exercises its oversight of prohibited IRA transactions, it is not alone since it shares that responsibility with the IRS. But the GAO finds that arrangement lacking, too. “While the two agencies do share some information, they do not have a formal mechanism to guide and monitor their collaboration,” the report says. The GAO says that out of the 124 IRA applications it reviewed, only eight reflected DOL contact with IRS.

The GAO also 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 but could do a better job of sharing it. For instance, the DOL does not share information on denials — which it notes the IRS could find useful for training IRS examiners and making educational outreach to IRA owners about prohibited transactions.


The GAO makes three recommendations:

  1. The Secretary of Labor should document internal policies and procedures for managing the IRA prohibited transaction exemption process.
  2. 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.
  3. 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.

Documenting procedures also could increase transparency about how applications are handled, the GAO says, reduce the risk of DOL employees carrying out their duties inconsistently, and help in retaining organizational knowledge in case key personnel leave unexpectedly.

By formalizing DOL and IRS collaboration, the GAO argues, the DOL and the IRS could reinforce their information sharing and identify new opportunities to improve their oversight efforts. The GAO suggests that a memorandum of understanding or other mechanism would be helpful in that effort; they also suggest that documenting procedures for that collaboration also would help them improve internal control over those activities.