2023 SDIRA Fraud Alerts

Investors value the self-directed IRA (SDIRA) for the freedom to invest in almost any type of investment while deferring taxes on contributions and investment gains. While the types of alternative investments popular with SDIRA investing, like real estate, private placement securities, precious metals, and private debt, have the potential to provide high returns, they also come with fraud risk.

Fraudsters have been known to exploit the lack of regulatory or legal oversight with these investments to prey on investors. Both the IRS and the SEC publish information each year on known schemes and fraudulent activity to help investors protect their personal information and their savings. 

The IRS Dirty Dozen

The IRS is on the lookout for fraud associated with tax scams, but these can also affect SDIRA investors. The IRS publishes an annual list of Dirty Dozen tax scams to alert taxpayers, businesses, and tax professionals to various scams and schemes it has targeted. SDIRA investors should be aware of at least these two schemes from the 2023 Dirty Dozen list:

  • Phishing (email) and smishing (text) – Unsolicited emails or texts from criminals posing as legitimate organizations in the tax and financial community, including the IRS and the states, attempt to lure victims into providing personal and financial information that can lead to theft. These communications entice victims with a phony tax break or frighten them with false legal/criminal charges for tax fraud. The IRS warns taxpayers to never click on any unsolicited communication claiming to be the IRS as it may open your system to malware. It may also be a way for malicious hackers to load ransomware that will keep you from accessing your system and files.

  • Schemes with international elements – Fraudsters lure U.S. taxpayers into hiding cash and digital assets in offshore accounts and structures with promises of tax avoidance. For example, a Maltese IRA scheme is a known arrangement involving U.S. citizens or residents who attempt to avoid U.S. tax by contributing to foreign IRAs in Malta (or potentially other host countries). The host country’s laws allow for IRA contributions in a form other than cash and do not limit the amount of contributions. By improperly declaring the foreign arrangement as a “pension fund” for U.S. tax treaty purposes, taxpayers improperly claim an exemption from U.S. income tax on gains and earnings in, and distributions from, the foreign IRA.

SEC Alerts

The SEC, the North American Securities Administrators Association (NASAA), and the Financial Industry Regulatory Authority (FINRA) monitor investment activity and issue Investor Alerts to help investors avoid potential scams. Their most recent alert is devoted to risks involving SDIRAs.

The SDIRA Alert reminds investors that an IRA custodian does not monitor or verify the quality or legitimacy of an investment or an investment provider or promoter. An SDIRA promoter is an individual or company that promotes and solicits money from investors specifically for SDIRA investing. According to the SEC, “Promoters may not be licensed investment professionals, and may not be subject to the same regulatory oversight and investor protection rules that govern the securities industry.”

 The Alert describes other risks associated with SDIRAs, including fraudsters posing as a fake IRA custodians or exploiting the characteristics of self-directed IRAs:

  • Lack of information – Unlike publicly traded securities, alternative investments may only provide limited financial disclosures or information.
  • Misrepresenting custodial responsibilities – Fraudsters may persuade investors that SDIRA custodians investigate and validate investments and that an investment is legitimate because an SDIRA custodian allowed it.
  • Long-term investments – Some investors, knowing that they’re holding their investments for the long term, may not review their investments often, allowing criminals more time to perpetrate a fraud undetected.
  • Complex tax rules – Some investors are unaware of all the nuances of the tax rules and that certain investments or investment strategies are prohibited.

You can find more information about a custodian’s limited role in STRATA’s Get to Know Your Custodian guide.


Tips for Avoiding Fraud

As an SDIRA investor, you are solely responsible for evaluating and understanding the investments you purchase with your IRA assets. In its Alert for SDIRAs, the SEC provides several steps investors can take to reduce the risk of fraud: 

  • Verify the information in account statements – SDIRA custodians rely on investors or investment promoters to provide accurate valuations of the investment at least annually. You may want to verify asset values provided by promoters by obtaining a valuation from an independent, third-party appraiser.
  • Avoid unsolicited investment offers and guarantees – Be wary of unsolicited investment offers that promote the use of an SDIRA, or of investments that require you to transfer money from traditional IRAs to an SDIRA. Claims such as “risk-free,” “zero risk,” “absolutely safe,” and “guaranteed profit” are key indicators of fraud.
  • Research investment providers/promoters – Ask the individual promoting an investment if they are registered or licensed, and if the investment itself is registered. Then verify their answers with an unbiased source, such as the SEC, FINRA, or your state securities regulator. You may also want to get a second opinion from a licensed, unbiased investment professional or an attorney.


Reporting Fraud & Investor Resources

A majority of fraud victims do not report the incident, but reporting is important because it establishes a foundation for other victims and increases the likelihood of legal and/or criminal action against the fraudsters. USA.gov offers a directory for reporting scams on a local and federal level. In the instance of financial fraud, the SEC encourages you to submit a report directly to their agency as well

As an active member of the Retirement Industry Trust Association (RITA), STRATA supports initiatives to help educate investors on how they can better protect their retirement savings against investment fraud and financial scams. Remember to be proactive, stay informed, and research organizations and investments prior to making important financial decisions. For additional information on how to protect your data online refer to STRATA’s Protect Yourself page. 

Tags: IRA investments, Roth IRA, SDIRA, self-directed ira, Traditional IRA