The IRS can garnish the full value of your IRA to comply with taxes and penalties. In a Solo 401 (k), the impact of a prohibited transaction isn't necessarily as damaging as in an IRA or Gold IRA accounts. An excise tax of 15% is applied on the amount of the prohibited transaction for each year or part of a year of the taxable period.
If the transaction is not corrected within the taxable period, an additional tax of 100% of the amount involved is imposed. Article 6662 of the IRC: Precision-related sanction that applies when there is no reasonable position not to declare or pay taxes. The fine is 20% of the amount that should have been paid. The tax rate will be equal to 15 percent of the amount involved with respect to the prohibited transaction for each year (or part of it) of the tax period.
The tax imposed under this subsection shall be paid by any disqualified person participating in the prohibited transaction (except a trustee acting solely as such). And the IRA itself must pay for those services with the IRA's own cash, since the owner of the IRA paying for the services on behalf of the IRA asset would again be a prohibited transaction or, at least, a considered contribution. In addition, it is essential to recognize that, for a transaction to be considered a prohibited transaction, only one of the above-mentioned exchanges need to take place between the owner of the IRA (or another disqualified person) and the IRA. Which, once again, can be considered a prohibited transaction and disqualify the IRA (since the owner of the IRA would be a party to the prohibited transaction).
Before submitting a deficit notification with respect to the tax imposed under subsection (a) or (b), the Secretary shall notify the Secretary of Labor and shall give him a reasonable opportunity to obtain a correction to the prohibited transaction or to comment on the imposition of such tax. For the purposes of subsection (d) (2), the term “correction period” means the 14-day period beginning on the date the disqualified person discovers, or should have reasonably discovered, that the transaction (without regard to this paragraph and subsection (d) (would constitute a prohibited transaction). In other words, “ignorance” is no excuse when it comes to prohibited IRA transactions, nor are the assurances of a self-directed IRA provider about the viability of holding several alternative assets in a self-directed IRA. However, the DOL reasoned that, due to the significant property interests of siblings, who are disqualified from having their own IRAs, credit investments would be a prohibited self-trading transaction.
When a transaction occurs between a retirement plan and a disqualified person, a prohibited transaction is generated. In fact, the GAO expresses concern that some types of alternative investments are sold in self-directed IRA accounts in a way that enriches the seller or promoter if the transaction closes, but denies any liability if the investment turns out to be a prohibited transaction, since in situations where the self-directed IRA provider offers “control of the checkbook”, ultimately, it remains the owner of the IRA to determine that all and each of the checks comply with the transaction rules prohibited. The Court ruled that this tax language did not constitute a prohibited transaction, since the owner of the IRA had no other personal obligations to the bank and, therefore, the language did not constitute a burden on the IRA nor did it imply an actual extension of the IRA's credit to the IRA owner. However, while these investments are not specifically prohibited from being owned by an IRA, additional difficulties do arise because of the limitations that exist between IRA owners and their individual retirement accounts.
Specifically, section 4975 of the IRC stipulates that the owner of an IRA (and any other person responsible for the IRA account) is prohibited from combining the financial interests of the IRA itself with those of its owner or any other related party, since all of these people are considered “disqualified persons”. The sale of personal property to the plan and of the promissory note for the balance of the purchase was a prohibited transaction. The DOL stated that the existence of an outstanding promissory note between the IRA and the owner of the IRA personally would be a prohibited self-negotiation transaction. The IRS Form 5330 is what is filed if the IRA made a prohibited transaction with a disqualified person who was not a fiduciary.
Even if you buy the shares of the company you work for, when it's a publicly traded company and you own a tiny fraction of the available shares, the property doesn't even come remotely close to the threshold needed to constitute a disqualified person and a potential prohibited transaction. .