[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.
[00:00:09] Speaker B: Hi.
[00:00:10] Speaker C: Welcome back to the Preferred Way. In this episode, we're going to be continuing our conversation with Carrie on audits and record keeping. If you missed the first episode, click the link below to watch. Now let's get back to the show.
[00:00:22] Speaker B: Unified business tax.
[00:00:24] Speaker C: Okay.
[00:00:26] Speaker B: Unified debt.
This is very interesting.
[00:00:30] Speaker C: Yeah.
[00:00:31] Speaker B: Because. And complex it is. It can be, it can be. So fair market valuations and unified taxes. I'm gonna talk about those two things because I think that's something that's completely misunderstood.
And I think we think of custodians as like, oh, they'll take care of it. Right.
But the reality is with a self directed ira, you're investing in, let's say you invest in a small business, a startup business, and that business files their taxes and they have operating income that came from it that triggers a tax inside of your ira.
But let's say that that operating business, for whatever reason, does not provide the tax reporting information that they filed to the custodian where you hold your investment.
Okay. If that step is missed, which, by the way, the custodian doesn't call entities and request tax documentation, it is either provided or it is not provided.
[00:01:37] Speaker C: Yeah.
[00:01:37] Speaker B: Okay. We're not sitting here on the phone every day trying to figure that out. But you, as the person who owns the ira, is responsible for making sure that that tax reporting information gets to your custodian.
If that tax documentation gets to the custodian that's been filed by the business and it has triggered either UBIT or udfi, then additional tax reporting is required because taxes will be charged to the ira.
[00:02:11] Speaker C: Yep.
[00:02:11] Speaker B: Associated with that investment.
If it's not provided to us, then we are not going to reach out to you to say, hey, yeah, we received this.
And oh, by the way, we need to complete a 990T because you owe taxes that need to come from your ira.
[00:02:27] Speaker C: Yeah.
[00:02:27] Speaker B: And oh, by the way, you don't have any cash in your ira, so how are we going to fix this problem? And oh, by the way. Right, that's where that trigger starts from a custodian to start going back to the client and saying, hey, we need to get some, some tax reporting completed on it. If we never receive it, we cannot be held liable for that.
[00:02:46] Speaker C: Yeah. We don't know. And that goes back to being important that it's titled correctly in the very beginning of the investment or transferring from another custodian.
[00:02:53] Speaker B: Yes. But since this is all about irs, what's going to happen if that tax reporting doesn't come to us and you did not pay the tax? Now, remember, that business likely filed taxes with the irs. Okay. There was some form of tax reporting that occurred, whether it be state, federal, both, something happened.
When that filing is filed, you are associated with that filing.
[00:03:20] Speaker C: Yeah.
[00:03:21] Speaker B: Your IRA is associated with that filing. If there is ordinary business income that derived from that business, which likely there was, and you did not pay any taxes from your ira, you just wave the red flag to the irs.
So they will connect the dots. And when they connect the dots, eventually it's going to be like, yeah, hello, they may have gotten the taxes from the business, but they didn't get taxes from you.
[00:03:50] Speaker C: Yeah.
[00:03:50] Speaker B: And they're going to come looking for.
[00:03:52] Speaker C: Yeah, they want paid.
[00:03:53] Speaker B: So make sure that if you're investing in assets that have some sort of tax reporting that should be coming to the custodian, it is your responsibility as the owner to make sure that tax reporting gets to us. Yeah, absolutely. So please, please, please, please, please make sure of that. Okay. What was the second one I was going to bring up? Not udfi, not ubit, but there was another one.
Oh, I can't remember what it was.
Maybe it had to do with the tax reporting. It does have to do with tax reporting. So the 990 Ts, when it comes to the completion of those, you know, a lot of people feel like it is the responsibility of the custodian.
It is not the responsibility of the custodian.
The custodian needs to execute the 990t, but we don't have to prepare it for you.
So we are not tax professionals.
Remember, there's a couple of things we don't offer. Tax advice or investment advice. That's not what we do.
[00:04:59] Speaker C: Yeah.
[00:05:00] Speaker B: So yes, we would have to employ somebody to complete the taxes, either you or we, coming from your IRA cost to your ira and it would be have to be filed and signed by the custodian and file with the irs. Now, will we be involved in the transaction? Yes. But are we required to file it for you?
No, we're not required to file it for you. If you have UBIT or UDFI that is identified through tax reporting that has come to us is our obligation to notify you. It is then your obligation to complete to complete the 990t form based on the information. And we will execute and sign off on it as the custodian to be filed with the irs. Yeah.
So just Keep that in mind. We don't employ CPAs.
We don't employ tax professionals. That is. That is not what we do. Now, some custodians provide it as a service, and that's okay. You can provide a service. If you employ a tax professional that sits there and completes 990Ts on behalf of clients, that is completely fine. We have not done that because we don't have enough clients that are investing in things that are sitting there doing that. But can we help assist in making sure that transaction is completed? Absolutely. It would come at a cost, as it would with any custodian. But it is your obligation to really pay attention to what you're investing in. And if it has any of those associated factors that would require additional tax reporting. Yeah, absolutely misunderstood. Definitely. But something that could become a red flag to the irs. Yeah.
[00:06:37] Speaker C: And that's something that you're going to want to double check with the investment sponsor, too, at that onset.
[00:06:41] Speaker B: Yes.
[00:06:42] Speaker C: Make sure you understand.
[00:06:43] Speaker B: Absolutely. Yeah, absolutely. All right, what's the next question?
[00:06:47] Speaker C: What about our documents? What type of documents do we keep on file for our own? Maybe internal auditing.
[00:06:55] Speaker B: Yeah.
[00:06:56] Speaker C: Or documents we need to have on file for external audit.
[00:06:59] Speaker B: Yeah. You know, it's interesting. I literally had to write a whole list here. It was so many things.
But what I didn't realize through doing a little research is custodians are not required to maintain all of this. And I didn't realize some of this. We do it.
[00:07:15] Speaker C: Yeah, we. We hold a lot of.
[00:07:17] Speaker B: Yeah, a lot more than probably we should. But obviously the application, you know, application and the disclosure and the agreements associated with your IRA should be maintained by us and by the client, which we send a copy to the client. But how many times have the clients asked us for that? Because I don't know. They have all the time. They don't keep records of it. And I don't know why, but they should.
Account statements.
So whether you want to set up monthly statements or annual statements, Most of our clients set up annual statements.
The reality is most of us don't look at those statements on a monthly basis. So what's the point? So most of our clients have annual statements. That's the one time of year that they're looking at it to be like, okay, what do I have in my retirement account? What did it earn? That sort of thing. So usually annually, obviously, you can log in 24, 7 and check on it anytime you want.
Any transaction requests, and I say any contributions, distributions, invoices, conversions, expenses, anything that you send to us, we are keeping record of, but so should they. Yeah, but we have all of those records associated with that. Any investment, due diligence files.
So we keep all of those. Any investment documentation that we receive. Operating agreement, private placement memorandums, I mean articles, organizations, everything, just everything. You know, if the company's in good standing, I don't know. Any form or documentation associated with the investment, we are going to keep. If you ask us to purchase a form of digital currency that maybe is in left field, we're probably going to keep documentation on that. Whether we buy it or not, we're going to keep documentation on that.
You know, any transaction, any in, any out, we will have the documentation for it, but so should you.
So we have all of those things. In some cases we may have recorded deeds, maybe we have original promissory notes. We could have original stock certificates, we could.
All of that documentation, we'll be maintaining. If it's original, we will be the only ones that have the original. So the client's not responsible for that. But as a client, keep a copy.
I mean, you never know with a custodian whether it gets lost or not. So keep a copy. What if their facility burns down?
At least have the copy because at that point you could at least get it recertified as an original with the investment sponsor if need be, given the situation, the occurrence, whatever were to happen. So always make sure that you have that.
What else? Any tax reporting say we do do tax reporting on behalf of the IRA, we would need to maintain the 990t on our records as well.
Any tax reporting we do on behalf of distributions, we would have those. Any 990 days, anything associated, we might have 1099 C's. If there's collection of debt, if there's loss, we may be sending those out to the individual that didn't pay you back.
We'll keep that in your file because that may come up again, especially when the IRS sees a 5498 and it's a huge reduction of value.
Maybe that would raise a red flag and they want to audit it. Okay, well, let's look at what happened, what transpired, what actions you took. You know what the outcome.
[00:10:44] Speaker C: 1099 was issued to the borrower.
[00:10:46] Speaker B: Absolutely. Absolutely. All year, 5498s on an annual basis. We will maintain record of all of that.
Any fair market valuations.
Yeah, you know, I love those clients that try to just put those fair market valuations into the last minute to reduce the value of their account based on how we charge our fees, which is kind of.
That could be a red flag too.
[00:11:09] Speaker C: Yeah.
[00:11:09] Speaker B: If. If we file a 5498 one year and it's a million dollars, and the next year we file and it's 100,000 and you didn't take a distribution.
Yeah.
[00:11:19] Speaker C: The IRS is going to wonder why.
[00:11:21] Speaker B: They are definitely going to want to wonder why. And we better damn well have records to illustrate why we felt inclined to. To do that, to reduce the value, which obviously there's forms and documentation associated with that as well, for cancellation of. Of either debt or investment based on. I mean, maybe. Maybe legitimately it. It did happen.
[00:11:43] Speaker C: Yeah.
[00:11:43] Speaker B: You could have invested in a startup and you put $900,000 into it and they went bankrupt.
[00:11:49] Speaker C: Yeah.
[00:11:49] Speaker B: So those circumstances happen, but when they do, that's going to be alarming variance from one year to the next. So something, you know, definitely you should consider.
What else? There's so many things. I mean, there's.
[00:12:04] Speaker C: We keep records of literally everything.
[00:12:06] Speaker B: We do. We do. All of our clients have an archive file.
And so we maintain absolutely everything. Every in, every out, every cash deposit. I mean, just.
[00:12:17] Speaker C: Yeah, everything's recorded.
[00:12:19] Speaker B: But you know what the client should be doing as well?
[00:12:22] Speaker C: The same thing.
[00:12:23] Speaker B: The exact same thing. Yeah. And I think most clients just wipe their hands of it. Like, the custodian will take care of it, and we. We will.
[00:12:30] Speaker C: Yeah.
[00:12:31] Speaker B: But I can't speak on behalf of every custodian. And so just keep that in mind and think about that licensing. Think about that examination. Because when we get examined, they pull all of those records. We have to check all of those boxes.
So through examination, they know that this is something that we will maintain. But not all custodians are examined, even.
[00:12:51] Speaker C: Though we do maintain all of that.
You should also, as the client, absolutely have all of that information.
[00:12:57] Speaker B: Absolutely.
All right, next question.
[00:13:02] Speaker C: Let's see.
I think we got into all this.
[00:13:08] Speaker B: Do we get it done?
[00:13:09] Speaker C: I think so.
[00:13:10] Speaker B: Mixing. Mixing and mingling of.
[00:13:12] Speaker C: Yeah, we did. We got into red flags.
[00:13:15] Speaker B: We got into the red flags.
[00:13:17] Speaker C: We got into disqualified persons.
[00:13:19] Speaker B: And we did.
[00:13:20] Speaker C: Where they come from.
[00:13:21] Speaker B: We did.
We absolutely did.
[00:13:24] Speaker C: So what makes Preferred Trust different?
We'll end with that.
[00:13:27] Speaker B: I mean, I don't know. I'm gonna put in quotes. A good custodian. What makes a good custodian?
You don't know you have a good custodian until you need them to be there for you.
[00:13:41] Speaker C: Yeah.
[00:13:41] Speaker B: And we've talked a lot about, you.
[00:13:43] Speaker C: Know, until they show you that they're.
[00:13:44] Speaker B: Not a Good custodian. Yeah. And I think a lot of it, you know, really has to do transparency.
I think it's a word that's kind of thrown out there just as like, oh, we're transparent. Okay, well, that's not sexy.
You know, being transparent is picking up the phone. Being transparent is responding to emails in a timely fashion. Being transparent is processing transactions timely.
That is transparency.
[00:14:17] Speaker C: Yeah.
[00:14:18] Speaker B: You know, being able to log into your account and see that the information was completed properly. That's transparency.
Knowing that the person on the other end of the phone is able to answer your questions with the right answers. Because let's be honest, anybody any of us can Google this shit, we don't even need to pick up a phone call or custodian, but test the theory.
[00:14:38] Speaker C: Yeah.
[00:14:38] Speaker B: You know, you can chatgpt that shit and figure out what your question is, get the answer, call the custodian, see if you get the same answer.
Examinations. That's transparency. So when you say the word, what does it mean?
[00:14:52] Speaker C: Right.
[00:14:53] Speaker B: And so I think when you were looking for a good custodian, you really need to test that theory a little bit. And all of those things you could do before you even sign up to open an IRA with them. And let's say you have a current IRA with a custodian and you're not getting any of those things, or the answers that you're getting are, oh, hold on just a second. You know, there's long pauses in between. Maybe they're doing training, not default them, because, hey, we got to train our employees. But make sure you get the right answer back. Make sure, you know, that all the things that we talked about today that they're keenly aware of.
You know, every employee with a custodian should be going through, you know, bsa, AML training, making sure that, you know, when you ask for a wire to be sent, that they're calling you to verify the wire instructions.
[00:15:39] Speaker C: Yeah.
[00:15:40] Speaker B: You know, that we're not just accepting forms and just processing, sending your.
There's so many things to transparency that I think are, you know, overlooked sometimes.
You know, even when we transpire. Digital currency. I verify with the client three verifications with the client to make sure it's them.
You know, stuff along those lines is where you really start to see the strength of a custodian.
Because, well, we just live in a world of a lot of people trying to take advantage of others. And it's hard. It's hard to combat criminals. It really is difficult. So you have to stay on top of that.
You Know, make sure that the transactions and the forms. And I know that it's a pain in the butt, but to fill out forms? Who wants to fill out forms? Nobody. You know what people want to do? They want to go online and click three buttons.
But what if your computer is hacked? What if your email's been hacked and somebody goes online, clicks three buttons, and transfers funds into their retirement account?
[00:16:42] Speaker C: Yeah.
[00:16:42] Speaker B: What if they request a wire into their personal bank account? Forms are a pain in the ass. And I get that. But at least when we get the form, we can verify certain things. We can verify email addresses, we can verify the IP addresses that, that it's coming from. We can pick up the phone and we can call the client. Because transactions aren't just beep, beep, beep, you know, button, button, button. Right. Those types of things, although may seem very archaic, there's a reason why we do it.
And we do not have clients losing money here.
[00:17:12] Speaker C: Right.
[00:17:13] Speaker B: And when we do have transactions, maybe a client fills out a form and they write the wrong bank account on there. Okay. We're going to send it to the wrong bank account, but as soon as we identify that it's happened, we're also going to do every goddamn thing we can in our powers to get it back.
[00:17:29] Speaker C: Yeah.
[00:17:30] Speaker B: So, you know, it's not just about the assurances that the client gets from filling out a form, which I know seems tedious and crazy, but it also gives you some reassurance that we're doing a valuation on that and we're kind of looking at it and going, that's not the client's email address. How many forms have we stopped? Because it's not the client's email address, the phone number is not the same, the signature doesn't match, the IP address doesn't match. It happens more frequently than people think.
How would we do that if it was all online with a click, click, click. How would we do it?
[00:18:04] Speaker C: And that's why we'll call to verify banking information as well, make sure we're sending it to the correct place.
[00:18:09] Speaker B: Yeah. If a client asks for a distribution to go to a different bank account, we track the bank account the last one went to. Yep. If there's a new bank account on file, well, then we're going to pick up the phone and we're going to verify verbally y with the client that they want it to go to a different bank account. Because that, to us, is a red flag. Yeah. And so do you think every custodian's doing that when they're 50 employees deep in the accounting department?
[00:18:33] Speaker C: Probably not.
[00:18:34] Speaker B: Probably not. They're probably just leaning on their insurance policies, filing insurance claims.
And granted, do we have insurance policies on these things? We absolutely do. But luckily I haven't had to use them. We do have to use them because we're going through the proper steps to do that. So that would be good.
A secure portal. I know that sounds crazy to say a secure portal. Everybody has a secure portal. Do they?
Do they? I mean, how do you know that the client that's coming into that portal is using a specific IP address that's unique to them? Coming into that portal, clicking those buttons.
[00:19:11] Speaker C: Yeah.
[00:19:12] Speaker B: I mean, really, how do you know that? What if their computer has. Has been stolen?
[00:19:15] Speaker C: Yeah, you never know.
[00:19:16] Speaker B: And they have all the passwords and they have everything they need to get into that computer. How do you know? And we can't prevent everything.
[00:19:22] Speaker C: Right.
[00:19:22] Speaker B: And I totally get that we can't prevent everything, but we have very strict limitations on our portal as to what clients can and can't do. And there's a reason for that. You know, anytime that you are a financial institution of any sort, the attacks on you are going to be fierce. Yeah.
[00:19:40] Speaker C: Higher than normal.
[00:19:41] Speaker B: Yes. So you have to be able to protect that.
What else makes a good custodian? Just freaking calling people back and emailing them back in a timely fashion, giving honest answers. Yeah. I mean, it just.
They may not like it, but they respect it. Yeah, they do respect it. And I think that's a lot of the reason why clients leave so many Reviews@Preferred Trust1. Because we say, hey, if your service was great, tell us about it. Absolutely, we do that. But they could also say it really sucked.
[00:20:12] Speaker C: Yeah.
[00:20:13] Speaker B: And you don't see a whole lot of those out there because we communicate quickly and they're always shocked by it. Isn't that crazy?
[00:20:19] Speaker C: I know.
[00:20:19] Speaker B: I always find that, like, why are you shocked that we communicated back?
[00:20:23] Speaker C: Why are you surprised I called you back?
[00:20:25] Speaker B: It's so weird, but they're so appreciative that we're calling them back. But what does that tell you? That tells you that they're not getting that same level of service elsewhere. If you're not getting that same level of service, then you need to move your account someplace else because you should expect to get that level of service.
[00:20:39] Speaker C: This is your retirement money that we're talking about.
[00:20:43] Speaker B: Yes. And education, what we're doing right now. I mean, it is so important. Just keep people educated. Let them listen to this on the drive home or when they feel like it or be able to Google it and find conversations like this, real conversations with 1. Real people that are running the company and performing these actual transactions.
Because this is what we do. I mean, this is our career. This is how we make sure we protect your ira. So know that the people behind the, behind the door are real people.
[00:21:13] Speaker C: Yeah.
[00:21:14] Speaker B: And I think, I think that's, that's important. And I don't think a lot of CEOs and, and individuals that are performing transactions, you don't get to see their faces, you don't get to talk to them, you don't get to hear from them.
It all, a lot of this all comes back down to that word transparency and just being very transparent with your transactions. So that's what I would say from, you know, good, whatever that means.
Maybe that makes the difference between good and great.
[00:21:38] Speaker C: Yeah. And I would agree Secret shop, too. Call a couple custodians.
Just make sure you call Preferred Trust also.
[00:21:45] Speaker B: Yes. Make sure you call us.
Anyways. Well, thank you so much. I appreciate you spending some time with us. And I, I hope that you are never audited by the irs.
I have never been, so I don't know what that experience would be like. But we have had clients that have. And I want you to know we document everything. So our record keeping, that is one thing that you can trust. So thank you so much for joining us on the Preferred Way and we'll see you next time.
[00:22:13] 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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