[00:00:00] Speaker A: You're listening to the Preferred Way, a retirement podcast brought to you by Preferred Trust Company, the preferred custodian for all alternative investments.
[00:00:10] Speaker B: Welcome back to the Preferred Way. Today I am joined with Alicia Ball, who's going to help, well, pose some questions about record keeping.
It's always a question with a self directed custodian who's responsible for what. So we're going to break all that down.
So hopefully we can kind of clear the air on some things. Yep. So this time, let's reverse this around. Usually I'm always asking the questions.
[00:00:35] Speaker C: Sounds good.
[00:00:36] Speaker B: I don't want to always ask the questions.
[00:00:38] Speaker C: I can ask you the questions.
[00:00:39] Speaker B: All right, ask me some questions.
[00:00:40] Speaker C: Okay. So let's start with the events that trigger an IRS audit in a self directed ira. What type of events would trigger an audit from the irs?
[00:00:50] Speaker B: All right, so I keep.
I can't specifically say why the IRS would.
I don't want to say pick on a person, but pick out a person that they're going to audit, but let's say that they do part of the audit is going to include everything.
So because we are filing tax reporting on your ira and you should hopefully be filing tax reporting for your personal taxes, maybe business taxes and et cetera. Usually it's a combination of all the things kind of colliding, or maybe it's just one of those things colliding that triggers a red flag to the IRS to audit you. And when that happens, likely they are going to pull in your IRA into the audit because we are filing tax reporting as well.
And in doing so, they're going to want to come to us and find out if everything checks out with your ira.
And so you may be getting a separate tax audit for your business, you may be getting a separate tax audit for your individual, but the IRA also can be audited as well. And I think most people think that they can just skirt that.
[00:01:58] Speaker C: Yeah.
[00:01:58] Speaker B: And that it won't happen.
But it will. And here's some of the reasons why. And probably the most logical reason is prohibited transactions. Yeah.
And a lot of times individuals do not realize what they're doing until it's already been done.
And it's very hard to unwind those things once they happen. Probably the most known facts is again, this, I go back to HGTV all the time because they glorify the fact of this fix and flips and your rental properties and own a ton of rental properties. This is easy.
Well, in an IRA it's not as easy because most people who are fix and Flipping are, are also real estate agents, property managers, plumbers, general contractors, whatever they are, they think that they can contribute to the cause of the transaction.
[00:02:51] Speaker C: Yeah. And you can't do any maintenance or repairs on a property that your IRA owns. You personally?
[00:02:58] Speaker B: Nope. But you also can't take in funds personally. And I think that's where, where when the IRS gets involved, they're really honing in. Because remember, we may not know that they did that either. Yeah, there, there could be a probability that that person has not disclosed to us through conversation that maybe they made money off of buying or selling the home. Maybe they made, I don't know, made improvements on the home. And we were not informed of it.
But the IRS will figure it out because when an audit occurs, they are going to run every single in and out of all your bank accounts to figure out where things were going. Because ultimately if the IRA is disqualified, the IRS is going to get paid a crap ton in taxes. And so that's probably the biggest one is the prohibited transactions that we just forget. We forget that we're doing it. Maybe it's intentional, maybe it's not. I think in most cases, probably non intentional. But it's very important that they understand that the other thing is very unusual or high risk investments.
I think we may start to see this more and more as the government's kind of cracking down a little bit on the different types of investments. Now, I know an IRA can invest in everything except just, just a couple things, two or three things. But there, there is some oddities. I'll give you an example. Let's say a person wants to invest in 60 different types of digital currency and they're buying and selling and buying and selling and buying and selling and buying and selling and you know, trying all these crazy things.
Why it could potentially raise a red flag as to why are you doing that.
Because maybe it's not normal. And I know a lot of custodians allow hot wallets.
We don't, you know, ours is cold storage. So we're very involved in the transactions and the ins and the outs and those sorts of things. And when the IRS in 2017 decided that digital currency would be considered a commodity and therefore allowable as an investment in ira, I don't think the IRS thought that people or custodians would allow individuals to buy and sell and swap and this and that. I mean, it's a very fine line there. And one that at preferred trusts at least we're not willing to cross.
[00:05:23] Speaker C: Yeah.
[00:05:24] Speaker B: And you know, although the IRS has come out recently and said, you know, mining is not something that's allowable and is a taxable event.
But they didn't for many years because you never know what people are going to do when you start offering a different type of investment.
So I think there's a higher risk tolerance that maybe the IRS would look at when it comes to those odd investments. Yeah, whatever those happen to be.
[00:05:50] Speaker C: And so in that, like compliance to protect investors, how do we handle that as a custodian?
[00:05:57] Speaker B: You know, compliance is super interesting because you would think that it's the responsibility of the custodian, but it really isn't the responsibility of the custodian. So due diligence is the responsibility of the individual. But I say a big but.
And I'll ask you this question.
Do we just allow people to invest in anything without doing any due diligence of our own?
[00:06:25] Speaker C: No, of course not.
[00:06:26] Speaker B: So again, fine line, because I'm not saying we're doing due diligence, but what are we looking for with an investment?
Does the company have to be a valid entity?
[00:06:37] Speaker C: Oh, yeah, yeah.
[00:06:37] Speaker B: Absolutely. But are we checking that?
[00:06:39] Speaker C: We are. I mean, the client should too, you know, on their end. You should absolutely do your due diligence on your end. But we do check that as well because we don't want to hold those assets either in your account that aren't going to come to fruition.
[00:06:52] Speaker D: Absolutely, absolutely.
[00:06:53] Speaker B: And then also the proper titling.
[00:06:55] Speaker C: Right.
[00:06:56] Speaker B: I mean.
Oh, custodians are custodians or custodians. I think everybody just assumes. Assumes all custodians are equal.
But you and I both know that when we have assets that are being transferred from other custodians or in or out or whatever the case may be, sometimes the assets aren't titled correctly.
[00:07:13] Speaker C: No.
[00:07:13] Speaker B: And which is shocking.
[00:07:14] Speaker C: Yeah. And if you have an investment property, when you go to sell it, how are you going to sell it if it's not the right owner?
[00:07:20] Speaker D: Exactly.
[00:07:21] Speaker B: So you have to absolutely make sure that it is titled properly.
[00:07:27] Speaker C: Exactly.
[00:07:28] Speaker B: And you know, the transactions as far as reviewing them, it really. The onus isn't on us, but we have to educate individuals. Yeah. I think we have an obligation. Not a fiduciary obligation, but we have an obligation to be a good steward. Yeah. We have an obligation.
Yes. To educate clients about things. If we, you know, this came up many years ago. It hasn't happened frequently. It doesn't happen very frequently, but when it does, I'm not the type to just sit back and just Allow it.
So we have had borrowers that have somehow, some way, you know, randomly, we have clients that end up with the same borrower, but a borrower that's delinquent.
And when a borrower is delinquent, we do flag it.
[00:08:19] Speaker C: Yeah.
[00:08:20] Speaker B: Our entire staff knows about it.
[00:08:22] Speaker C: Yep.
[00:08:23] Speaker B: So if we see that transaction come in again, you have to ask yourself from an obligation standpoint, moral obligation, do you say something? Do you not?
We believe you say something.
[00:08:36] Speaker C: Yeah.
[00:08:36] Speaker B: When a borrower is in default, known default, maybe there's some legal action that has been taken.
The last thing we want to do is to avoid having that conversation.
[00:08:49] Speaker C: Yeah.
[00:08:50] Speaker B: And so we will at least inform the client of the fact that we may have, there may be some outstanding obligations of this borrower that haven't been paid to other clients. You may want to refer back to that borrower and find out a little bit more about their track record.
But we would proceed.
[00:09:11] Speaker C: Yeah, if you want to proceed, we'll proceed.
[00:09:13] Speaker B: We will proceed. But if we know that there is something going on, we will likely say something to you.
Now, again, that's only happened a couple of times the other time that we might say something. Do you remember that operating agreement? And they wouldn't sign it. And they, you know, we asked them the question, you know, because we're trying to gather our information so that we have the proper documentation for the investment.
But sometimes they're a little shady. I'm going to say the word shady.
[00:09:40] Speaker C: Yeah. If.
[00:09:41] Speaker B: Talk to me about that. Do you remember that?
[00:09:43] Speaker C: I do remember that. If you have a company, you know, that you're wanting to invest in and they don't have an operating agreement.
[00:09:49] Speaker B: Yeah.
[00:09:50] Speaker C: I mean, that's red flag.
[00:09:51] Speaker B: Oh, absolutely.
[00:09:53] Speaker C: How do you operate?
[00:09:54] Speaker D: Absolutely.
[00:09:55] Speaker C: So I do remember that situation. We had an operating agreement, wasn't signed, wasn't executed, you know, probably came straight off of Google. Yep. Yep.
[00:10:04] Speaker B: Give me an operating agreement.
[00:10:05] Speaker C: And in that situation, you know, we did inform the client. We told the client. These are our concerns. This is why we're concerned about it. You should review it. Also, Klein ended up wanting to proceed, which is fine.
[00:10:17] Speaker B: Yeah.
[00:10:17] Speaker C: But he was aware that it was a red flag for us.
[00:10:21] Speaker B: Yeah. So if it does trigger a red flag, we will talk about it. I'm not going to say every custodian would, but we will. It is a self directed ira and I understand that. But as a custodian, you also have to protect yourself. Yeah. So the last thing we want to do is to have our clients get involved in investments that later on could create some liability for the company. I know some people are like, what? Why would that create liability for the company? Well, if there's a lawsuit that ensues, it is Preferred Trust company. FBO client's name they are going to file against Preferred trust company.
So if we have an opportunity to prevent some of that from happening, then obviously we are going to do that.
But another red flag. Let me talk about another red flag when it comes to segregation of client funds, you know.
[00:11:11] Speaker C: Yeah. Mixing personal funds and IRA funds.
[00:11:14] Speaker B: Yes.
When we have clients that are like, you know, I just want to buy 25% of this property in my IRA.
[00:11:21] Speaker D: Okay.
[00:11:22] Speaker B: And then we ask them, where's the other 75% coming from? And they say, oh, I'm personally going to purchase it.
Sometimes that kind of waves a flag for us.
[00:11:31] Speaker C: Yeah.
[00:11:31] Speaker B: I can assure you that is going to raise a flag for the irs. Absolutely. If you are being audited, you better make damn sure that every penny is accounted for.75% for personal, 25% for qualified funds. Because if you commingle one penny of that, you could potentially be disqualifying your entire ira.
[00:11:54] Speaker C: Yeah.
[00:11:55] Speaker B: So know this, when you say that to us, we definitely are like, bing, bing, bing.
[00:12:01] Speaker C: Yeah.
[00:12:02] Speaker B: This could potentially be an issue in the future now with us when we have payments and processing and all of those things, the segregation of those funds. You know, we notate the exact percentage of ownership clients have and we to the t pay the exact amount. Which is crazy because how many forms do we get where they define the percentage?
[00:12:23] Speaker C: None.
[00:12:23] Speaker B: Zero. Yeah, zero.
And are they doing that because they're hoping that they get 100% refund maybe or return on funds that have been spent. But I can assure you that some of these self directed custodians have gotten so big, so large, how in the heck do you track that?
[00:12:46] Speaker C: Yeah, it's hard. I mean, it's hard for us to track it.
[00:12:49] Speaker B: It's very hard. So you have to be working with the right custodian that's paying att to the percentage of that ownership. Because if they're not, they are justifying your IRA on your behalf. Congratulations to you. Yeah.
[00:13:04] Speaker C: And that's when it becomes important for the client to keep track of all that too.
[00:13:07] Speaker D: Absolutely.
[00:13:08] Speaker C: If you see something wrong or a percentage incorrectly being paid, then bring that to our attention too.
[00:13:14] Speaker D: Absolutely.
[00:13:15] Speaker B: Because if you don't.
[00:13:16] Speaker C: Yeah.
[00:13:17] Speaker B: That will come up in your IRS audit. 100% will come up.
Another red flag they should look out for is when you're working with a custodian you know, the IRS rules and regulations require that it is a licensed custodian, not somebody who's not. Not somebody who's not regulated. Licensing typically requires regulations, typically alludes to an audit or an examination or a review.
If those things are not happening, that should be a red flag to you.
[00:13:50] Speaker C: Yeah.
[00:13:51] Speaker B: If you are working with a custodian that is not required to be examined annually or biannually or whatever it is, that would concern me.
[00:14:01] Speaker C: And that kind of goes into play. Custodian versus administrator.
[00:14:05] Speaker D: Absolutely. Absolutely.
[00:14:07] Speaker B: There's some that aren't required to be licensed at all.
[00:14:09] Speaker C: Yeah.
[00:14:10] Speaker B: And there are some states that have very minimal, minimal requirements within that state. I would steer clear of that as well. So even though they are licensed, maybe they're not examined ever. Yeah. Do you know how many times the IRS has come in here and audited us? Exactly zero times.
So the IRS is depending upon the banking regulations of states to help audit these licensed custodians. But if they're not doing it.
Yeah, that would, that would raise a flag for me.
[00:14:41] Speaker C: Yeah.
[00:14:41] Speaker B: I would want to know, you know, when you, when you deposit your paycheck into a bank. Okay.
And you're not taking all the funds out and your cash is sitting there, are those banks being audited?
[00:14:52] Speaker C: I hope so.
[00:14:53] Speaker B: You hope so. Right. Because this is your hard earned money.
[00:14:56] Speaker C: Yeah.
[00:14:57] Speaker B: So that. I hope so. Should apply to a custodian as well.
[00:15:01] Speaker C: Absolutely.
[00:15:01] Speaker B: Because this is your retirement account. This is what you're expecting to have when. When you retire. So those are just some of the red flags that, you know, we are looking for. But they should be as well.
[00:15:13] Speaker C: Yeah, absolutely.
[00:15:13] Speaker B: They definitely should be as well.
[00:15:14] Speaker C: And as far as, like our communication to clients, you know, we communicate that to clients. How important is that?
Well, to make sure that we're communicating those things.
[00:15:25] Speaker B: Yeah.
The mishandling of.
Of IRAs and funds and those sorts of things.
I don't think custodians intentionally do it.
[00:15:35] Speaker C: Right, right.
[00:15:36] Speaker B: Nobody sets out and goes, oh my gosh, I'm absolutely going to disqualify this ira.
But here's our reality. You know, we live in an environment now where employees come and go pretty quickly. We're always looking for the next best thing. We're looking for that remote gig where we can hit the road on our rv. We're looking for all of these things.
So if. And this is hard, I will say, as a CEO, this is probably one of the hardest things to make sure you're keeping track of is the training and the hiring process. Of the individuals that are processing this, and if they are not adequately and properly trained, they could be disqualifying a client's ira.
[00:16:19] Speaker C: Yeah, unintentionally. Just because they were trained.
[00:16:22] Speaker D: Absolutely.
[00:16:24] Speaker B: So probably one of the, one of the biggest things that you need to watch out for.
You know, when you call a custodian, it's okay that you get a voicemail. You know, you're not going to get an answer every single time, but you shouldn't get a voicemail every single time.
[00:16:45] Speaker C: Or callbacks within callbacks.
[00:16:47] Speaker B: Yes, callback should happen same day. You know, as long as they're happening within a reasonable timeframe of, of, you know, the, the departure of the employees. And if not, it should happen first thing the next morning. If you are waiting days to get a call back, what does that say to you? Yeah, I mean, ask yourself, what does that say?
Are they equipped with the right people?
Do they have enough to process the transactions?
Why am I waiting days? Am I waiting days because the funds aren't available? Yeah, you know, all of those things. You need to start asking yourself those questions because I don't care if you're the largest custodian in this country.
Adequately prepare for the number of clients you have.
[00:17:33] Speaker C: Yep.
[00:17:34] Speaker B: Trend that out. See how many calls you're getting a day. Make sure you're properly allocating the right amount of people for the associated amount of clients that you have.
And if you're not doing that, think about what's happening behind the scenes. If you have to wait three days just to get a call back, how.
[00:17:53] Speaker C: Long are you gonna wait to get something processed?
[00:17:56] Speaker B: Exactly. That's exactly my point. You know, we're starting to see, okay, three days to five days. Five days to seven days, seven days to 10 days. Now we're hearing 30 days to process things. Think about that for a second. If you walked up to an ATM and you wanted $20 and the message said 30 day wait, please come back in 30 days at this time. Are you freaking kidding me right now? Like, those are the types of things that I think that, you know, definitely, definitely watch out for.
I don't know. Using a qualified custodian is super important. Don't. Don't get me wrong. Making sure the assets are title super important.
So separate bank accounts.
Let's just talk about Checkbook LLCs for a second, okay?
Oh, Lord.
So probably the.
[00:18:48] Speaker C: You have to be very familiar with.
[00:18:50] Speaker B: Biggest amount of you're going to see is going to be in that. But lucky for clients, I say this, lucky for clients I know the IRS knows about Checkbook LLC.
[00:19:05] Speaker C: Yes.
[00:19:05] Speaker B: Or IRA Checkbook LLCs, or whatever terminology you want to use. The reality is it is a bank account and an entity that is owned by your IRA that you now have the authority and privilege to conduct business with transaction.
Okay.
How many of those individuals do you believe understand the rules and regulations of an IRA?
What percentage would you say?
[00:19:39] Speaker C: I would say 15 to 20%.
Yeah. There's a.
There's a lot to understand about IRA LLCs. You have to know the regulations of the actual IRA.
[00:19:54] Speaker B: Yes.
[00:19:55] Speaker C: You have to follow the same ones.
[00:19:56] Speaker B: Yeah. You're acting in the capacity of a custodian without being licensed to do so. Yep.
So I think at some point, when the IRS figures all of this out, I don't think those are gonna be around.
[00:20:10] Speaker C: Yeah.
[00:20:10] Speaker D: They're.
[00:20:11] Speaker C: That's gonna be a massive audit.
[00:20:14] Speaker B: That is incredible that it's even allowed to be honest with you. Because the whole premise behind an IRA was one, it was granted by the government as an option for a retirement account, both traditional and Roth.
And then we're going to turn and require it to be held under a licensed custodian. And then we're going to start allowing Joe Schmo, Mary sue to act in that capacity. Yeah. Yet the custodians holding the liability of that person, hopefully conducting themselves under the rules and regulations the IRS has set forth for IRAs. Give me a break.
This is probably the biggest red flag that the irs, at some point, as they're looking to kind of streamline. I would be shocked if 5498 form 5498s do not start to include checking a box of. If the IRA owns a Checkbook llc.
[00:21:19] Speaker C: Yeah.
[00:21:20] Speaker B: Because all of those individuals will likely be subject to an audit.
[00:21:26] Speaker C: Yeah.
[00:21:26] Speaker B: So if you're gonna go down that path, and. And there are the 15 to 20% that maybe legitimately are doing it, but there's a lot that aren't.
[00:21:35] Speaker C: Yeah.
[00:21:36] Speaker B: And it's very, very difficult. Custodians do not know all of the ins and outs. Yes. Do we get bank statements on them? Yes. Do we review them? But what are we. How are we going to dissert what they're doing inside of there? Because they have the ability to do it.
[00:21:53] Speaker C: Yeah. How do we know the Home Depot transaction was, I don't know, property in the llc?
[00:21:59] Speaker B: I have no idea.
[00:22:00] Speaker C: Yeah.
[00:22:00] Speaker B: I have no idea. Only that person does. Yeah.
And now they're subject to it. But I'm very curious to see. See what happens to the Custodians in those situations, because it's allowable, it can be owned. But custodians can also decide not to allow individuals to hold checkbook LLCs. And I always say to you guys, make sure you vet them.
[00:22:23] Speaker C: Make sure they know what they're they're doing.
[00:22:26] Speaker B: Yes. See if you're having a conversation with them when they're asking to set up a checkbook llc, have a conversation with them.
Just pick. Pick a few questions, see how they answer it. See if they're qualified to really have a firm understanding of what they're getting themselves into.
So that's where I think there can be a lot of, you know, maybe a little bit of misunderstanding.
[00:22:50] Speaker C: Yeah.
[00:22:50] Speaker B: When it comes to this and the importance of it, it's, like, incredibly crazy. And you better detail those records, like.
[00:22:58] Speaker C: And keep them separate.
[00:22:59] Speaker B: Nothing you've ever detailed before.
[00:23:01] Speaker C: Keep them separate from any personal records.
[00:23:04] Speaker B: Absolutely. Because you may own four different investment properties. You may have a property manager that's handling all four. Make sure you allocate it. A fourth, a fourth, a fourth, a fourth. I mean, you almost have to keep 100% separate financials for each asset you own inside of that checkbook llc.
[00:23:24] Speaker C: Why would somebody want to do an IRA LLC if the custodian can do all the transactions and process the payments?
[00:23:32] Speaker B: I know.
[00:23:32] Speaker C: Why would somebody want an IRA LLC?
[00:23:35] Speaker B: Because I don't have three to five days, just seven days, to 10 days, to 30 days to wait for things. So I think a lot of times, I mean, we don't have a ton of them here, and I don't think we do because our processing times are so short.
[00:23:46] Speaker C: Right, right.
[00:23:47] Speaker B: So it's like, oh, let me just bypass the $800 a year and having to go set up a bank account, having to manage this on my own because, you know what, I send in an event, you know, an invoice, and it's paid.
So, you know, let us be the accountants. Yeah, not a problem. We have no problem with that whatsoever. And we'll associate it with the proper asset, which. Oh, that's a whole nother topic, but whole nother podcast, Whole other podcast there. But we will associate with the right asset. So you will at least have that sense of comfort to know that if we pulled a specific asset, you would see all the ins and the outs of that asset. The. You got an IRS audit. No big deal. Here's the four files. Here's the documentation. Here's. We literally have everything on that, even though we're not required to maintain all of that, which is interesting. We keep it all. Yeah, we have all of it. So if you ever were to be audited, we will have that information for you. Now, if you're out there gallivanting on your own, then you're on your own. Yeah. Better.
Really can't help you. Yeah. You know. And we are going to plead the fifth.
You heard it here. Custodians will plead the Fifth. If you have an IRS audit and you own a checkbook, llc. Because what else are we going to do?
[00:24:55] Speaker C: Yeah. We. There's no records. We have no records. Other than an annual bank statement.
[00:25:00] Speaker B: Yep.
[00:25:01] Speaker C: To adjust the value.
[00:25:02] Speaker B: That's right. To make sure that we're properly reporting what the value is of the ira. But inside of it, I have no idea what you own, what it consists of, what you bought, what you sold, what you took as a loss, a gain.
No idea.
[00:25:16] Speaker C: Yeah.
[00:25:16] Speaker B: No idea. So that. That is not a comfortable situation for a custodian to be in. And I can assure you the IRS will take full advantage of you.
Full advantage of you when it comes to that.
[00:25:28] Speaker C: Thank you guys for listening to this episode of the Preferred Way. Don't forget to, like, comment and subscribe, and we'll see you next time.
[00:25:36] Speaker A: Thanks for joining us for another episode where retirement savers meet alternative investments. Can't wait for the next episode. To learn more, visit our
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