Fair Market Value every year for EZ filers?

[Brenda Wren]

Quite a few years ago I sat audit for an EZ filer.  Although we had always advised him to value his real estate investments at Fair Market Value each year, it did not take our advice.  Consequently, the very eager IRS agent sanctioned him $15,000 (after negotiating from $25,000) for failure to do so and for carrying the real estate at cost year after year.  No harm to anyone, no issue with RMD's, but she wanted to get him for something, or so it seemed at that time.  I remember her coming into the office on September 30, picking up the check for $15,000 before she went on furlough the next day.  Obviously, a very unpleasant situation and I posted on this Forum about it at the time.  Fast forward to today.  I have a new EZ client who has real estate in the plan and has never been told by his prior TPA about this requirement.  So I went looking for it in the IRS 5500 instructions.  And what do you know?  The blurb about "fair market value" is included in the 5500SF instructions with a reference to ERISA section 3(26).  But it is NOT in the instructions for the EZ form!  Is it possible that EZ filers are not subject to this rule since those plans are not subject to ERISA??????

[Lou S.]

The requirement still exists as you a certifying the EZ is complete an accurate under penalty of perjury and that includes the FMV of assets reports. That said for a 1 person EV like you said unless it affects a distribution of the real estate or the value of assets for an RMD it really is a kind of a "no harm no foul" situation. Though as you learned from the audit that it can be an expensive fix. Make the client aware of them requirements and then put the onus on them to supply the the FMV for the 5000-EZ.

I have had a few EZ audits in the past where the assets were not readily tradable on an open market (either real estate or 3rd party loan notes) and auditor didn't blink at the values being reported without an independent appraisal, but that more goes to show that every auditor is different because they certainly could have pushed the issue but didn't. I think  they were more making sue that 415 limits weren't being exceed so sometimes it can depend on the nature of the audit.

[Brenda Wren]

Thanks, Lou.  Appreciate your input.  When I pushed back with the auditor, she did admit that an independent appraisal was not required, but that the Trustee has an obligation to determine FMV annually.  So we usually advise our clients to get comparable sales or SOMETHING to justify the value they place on the alternative assets each year.  We don't need to see it, but we tell them to keep it in their records.

[CuseFan]

I'm assuming these were/are all DC plans, because DB plans must use actuarial value of assets (usually FMV) for determining funded status and minimum required contributions.