Is the IRS Watching Your Self-Directed IRA? What Form 5498 Reports

“I’ve heard the IRS is just starting to examine self-directed IRAs, especially checkbook IRAs. Do we need to be concerned?”

Form 5498 is how the IRS knows what kinds of assets your self-directed IRA holds and what they’re worth, every year. In our September live Q&A, a listener said tax attorneys told them the IRS is only starting to examine self-directed IRAs, especially checkbook IRAs. Guest John Bowens of Equity Trust Company and Laura Dohanes, CPA, reframed the question.

Quick answer: Yes, the IRS knows. Every year your custodian files Form 5498, which reports your IRA’s fair market value, including hard-to-value alternative assets, with a code for the type of asset (and a catch-all code when you hold more than two types). The better question isn’t “is the IRS looking?” but “would this deal hold up?” Document your position before the deal, and give your custodian a supported valuation every year.

Does the IRS know what your self-directed IRA holds? Yes

John’s first answer: “We always need to be concerned.” He won’t speak publicly about what the IRS is or isn’t doing, but he was clear on this: the IRS knows you hold alternative investments. Custodians file Form 5498 every year, and for assets without a readily available market value, meaning anything that isn’t publicly traded, they report the value and a category code (for example, real estate, a non-traded LLC or partnership interest, or a private note). If the IRA holds more than two types, a general code is used.

The right question: would it hold up?

Prohibited transactions shouldn’t scare anyone, John says. The goal is straightforward transactions. If you want to be aggressive and work in gray areas, nobody will stop you, but pay for good counsel and build a narrative that can be supported if you’re challenged. Instead of worrying about whether the IRS is looking, do strategic tax planning with a professional, understand the risks, and document why the transaction is a good one.

The code, the facts, the case law

Laura added how a position actually holds up. Start with the tax code that supports it. Where the code is silent (and there are many gray areas), you rely on the facts and circumstances and on court cases. Anyone advising you should be able to show you what their position rests on: the code first, then the facts and the case law.

The best defense comes before the deal

If you’re building something large or at scale, design the whole structure (the diagram) with the right specialists before you start, rather than trying to fix it at the end. Document your position: what you’re relying on, and whose counsel. Custodian, TPA, attorney and CPA each have a role, and they need to work together. Small, simple deals? Try them and learn. Just check the rules and talk to the right people first, because a prohibited transaction of any size disqualifies the whole IRA.

What Form 5498 reports about your self-directed IRA’s value

Do you have to report what your IRA is worth? Your custodian does, which is why custodians ask for a fair market valuation each year with supporting documents. How each asset is typically valued, per John:

• Promissory notes and private loans: the unpaid loan balance.
• Real estate: a broker price opinion or appraisal; Equity Trust also accepts a screenshot of an online estimate such as Zillow.
• Private equity, LLC or LP units: an updated value supplied by the sponsor each year.
• Precious metals, crypto, stocks and funds: market or spot prices, so no separate valuation is needed.

Those values matter: they drive required minimum distributions and the tax on any Roth conversion. For a Roth conversion or an in-kind distribution, use an appraisal.

Official IRS reference: IRS — About Form 5498, IRA Contribution Information; see also the Instructions for Forms 1099-R and 5498

Key takeaways

• Custodians report your IRA’s value to the IRS every year on Form 5498, including alternative assets.
• Alternative assets get a type code; holding more than two types uses a general code.
• Ask whether a deal would hold up, not whether the IRS is looking.
• Build and document your position before the deal, with the right specialists.
• Give your custodian a supported value each year: notes at balance, real estate by BPO, appraisal or estimate.

Form 5498 FAQs

Related questions from this Q&A

• The full September self-directed IRA Q&A with John Bowens: every question on one page
• Prohibited transaction penalty: IRA vs Solo 401(k)
• Self-directed IRA custodian: will they stop a bad move?

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Guest: John Bowens, Director & Head of Education and Investor Success at Equity Trust Company, appeared as a guest. Custodians, including Equity Trust Company, do not provide tax, legal or investment advice.

Disclaimer: This article is for educational purposes only and is not tax, legal, or financial advice. Every situation is different. Talk to a qualified professional about your specific facts before making any decisions.