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Retirement plans holding assets that do not have a readily ascertainable market value are in for more scrutiny by the Internal Revenue Service. The Service recently announced that it will carefully look at plans holding assets such as closely-held stock, real estate, limited partnerships, coins, and collectibles to determine whether these assets are being properly valued.
The IRS is concerned that if these assets are not valued at least annually by qualified, independent appraisers, then rank-and-file plan participants may be cheated out of a portion of their benefits. According to recently published Audit Guidelines, failure to obtain annual independent valuations could lead to disqualification of the retirement plan. (Audit Guidelines are, in effect, instructions to IRS agents who are engaged in con- ducting audits.) The publication of these guidelines, together with recent public comments from IRS officials, leaves no doubt that plans holding assets that are difficult to value will be audit targets. Plans will be selected for audit based upon a review of asset information reported by the plan on Form 5500.
Unfortunately, the annual valuation rule is sometimes difficult to satisfy. For example, it may not be possible to get adequate information to accurately value a limited partnership interest. Nevertheless, it is important that the plan correspond with the partnership and make a serious effort to obtain as much information as possible to demonstrate the plan's good faith effort to comply with the valuation requirement.
Whenever possible, have nontraditional assets valued by independent appraisal and be sure to do the following:
Make sure the valuation is given to you in writing. The valuation document should identify the person who provided the valuation as well as his or her qualifications.
Have the appraiser explain in his or her valuation the methodology used to arrive at fair market value.
Take care that the appraiser is truly independent. Relatives, friends, and the like are not good choices. If your company's accountant also takes care of the plan's accounting, the accountant may not be considered "indepen- dent" for this purpose.
In the case of real estate, don't rely on tax assessment documents. These are generally held to be inaccurate. Because of the ready availability of real estate appraisal services, the Service will expect a formal valuation.
Given the expense associated with annual valuations as well as the increased likelihood of audit, you may want to have the plan divest itself of "problem" assets in favor of more marketable investments.
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