Background Created as part of the Employee Retirement Income Security Act of 1974, as amended (ERISA), traditional IRAs provide tax advantages to help individuals—including small business owners, independent contractors, and other workers not covered by employer-sponsored retirement plans— save for retirement. Employees who have employer-sponsored retirement plans, such as a 401(k), can also roll over these assets into an IRA when they retire or change jobs. Since the enactment of ERISA, different types of IRAs with different features for individuals and small businesses have been created. The two IRA types with federal income tax benefits for individuals are traditional IRAs (which allow eligible individuals to make tax-deductible contributions and accumulate tax-deferred investment earnings) and Roth IRAs (which allow eligible individuals to make after-tax contributions and accumulate investment earnings tax free). IRA owners are able to invest their IRA savings in a wide variety of asset types. IRA owners generally make tax-favored contributions to their accounts to purchase assets from investment options offered through banks or other IRS-qualified firms acting as custodians of the IRA assets. Most IRA custodians limit holdings in IRA accounts to firm- approved stocks, bonds, mutual funds, and CDs. Some custodians offer so-called “self-directed IRAs” that allow investments in a broader set of unconventional assets—such as real estate, certain precious metals, private equity, and virtual currency—than is permitted by most IRA custodians. As we previously reported, custodial agreements for these accounts often require IRA account owners to be responsible for directing their investments, and to oversee the selection, management, monitoring, and retention of all investments in the account. The account owners bear the consequences of any mistakes made in managing their accounts, such as being noncompliant with IRA rules. Through our prior work, we identified the following four areas where complex rules are likely to apply to IRA owners investing in unconventional assets: Barred investments. Investments in life insurance contracts and collectibles, such as artwork and antiques, are prohibited. Although precious metals are generally prohibited collectibles, certain types of coins and bullion are permitted provided that they meet specific purity and custody requirements. Prohibited transactions. IRA owners are not permitted to engage in prohibited transactions that personally benefit the owner or other disqualified persons in a way other than as a vehicle to save for retirement. Examples of such prohibited transactions include IRA owners selling their own property to an IRA, or taking a salary from an IRA-funded business. IRA owners who believe that an otherwise prohibited transaction should be permitted, may apply to the Department of Labor (DOL) to request an exemption for a specific transaction. Unrelated business income. Earnings and profits made in tax- deferred savings vehicles like IRAs generally are reinvested in the account without generating current federal tax liability, but investments in certain unconventional assets can generate ongoing tax liability for IRA owners. Any IRA that earns $1,000 or more of gross income from an unrelated business must file Form 990-T Exempt Organization Business Income Tax Return with IRS and pay related taxes. Fair market value (FMV). When IRA owners invest in less conventional and nonpublicly traded assets, custodians may find it challenging to properly report the FMV of those assets. Starting with tax year 2015, IRS began requiring IRA custodians to report selected information on unconventional assets in their clients’ accounts. For some hard-to-value unconventional assets, IRA owners may need to supply custodians with independent appraisals or other evidence to substantiate an asset’s current FMV. Failure to abide by the rules governing IRAs with unconventional assets can have significant consequences for IRA owners. For example, if an IRA owner engages in a prohibited transaction that has not been exempted by DOL, the IRA will lose its tax-favored status, and the account is treated as distributing all of its assets to the owner at the FMV on the first day of the year in which the prohibited transaction occurred. Noncompliance with IRA rules—if not detected—can also lead to millions of dollars in uncollected tax revenue for the government. Individuals who invest in certain unconventional assets using Roth IRAs can avoid taxation on investment gains. For example, founders of companies (or key initial investors) who use IRAs to invest in nonpublicly traded shares of their newly formed companies can realize many millions of dollars in tax-favored gains on their investment if the company is successful. IRS is responsible for enforcing IRA tax laws, including rules that apply when IRA owners invest in unconventional assets. Within IRS, four business operating divisions have responsibilities for enforcing compliance with IRA rules. Table 1 provides an overview of each division’s IRA enforcement activities. Third-party reporting by IRA custodians provides information that taxpayers can use in preparing their tax returns and that IRS can use to identify noncompliant taxpayers and help close the tax gap. In 2015, IRS began requiring custodians to report new information to help identify IRAs with hard-to-value unconventional assets. IRS Form 5498 IRA Contribution Information has a new box 15a for custodians to report the portion of the IRA FMV attributable to nonmarket assets as well as a box 15b with codes describing the type of nonmarket assets. Custodians are to report similar information on IRS Form 1099-R identifying distributions of IRA assets that do not have a readily available FMV. Primary IRS Publication Could Better Help IRA Owners with Unconventional Assets Understand Complex Rules The first article in the Taxpayer Bill of Rights is the right to be informed which means that taxpayers have the right to know what they need to do to comply with tax laws. IRS’s Publication 1, Your Rights as a Taxpayer, further states that taxpayers are entitled to clear explanations of the laws and IRS procedures in all forms, instructions, publications, notices, and correspondence. To help taxpayers and their advisors better understand tax rules, such as those governing IRAs with unconventional assets, IRS produces several types of resources. Taxpayers (or their advisers and paid tax preparers) with complicated returns or transactions may require detailed and technical resources, such as guidance published in a weekly IRS publication called the Internal Revenue Bulletin (IRB). Tax regulations— issued by the Department of the Treasury (Treasury)—are published in the IRB together with technical IRS guidance such as revenue rulings and revenue procedures. IRS has stated that only guidance published in the IRB contains IRS’s authoritative interpretation of the law. IRS also produces resources that are less technical and intended to be more easily understood by most taxpayers. IRS issues hundreds of publications on a variety of tax topics, and many are updated annually. IRS also produces a variety of information on its website (IRS.gov) such as online tools, instructions, and FAQs. IRS’s Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), and Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), serve as a general IRA handbook for IRA owners and a logical starting point for all IRA owners with tax questions, including those with unconventional assets. At more than 120 pages combined, Publications 590-A and 590-B comprise one of IRS’s longest publications on retirement related topics. Publications 590-A and 590-B provide some limited information on the four compliance topics that we identified through prior work as likely to affect IRA owners with unconventional assets. However, the two-part publication lacks additional information that IRA owners with unconventional assets need to comply. Publications 590-A and 590-B recommend that taxpayers research IRS’s website (IRS.gov) for additional information. We found some additional information on IRS’s website about three of the four compliance topics. This information was typically in the form of FAQs in a section of IRS’s website about retirement plans (https://www.irs.gov/retirement-plans). Table 2 summarizes: what information for IRA owners with unconventional assets can be found in Publications 590-A and 590-B; what other IRS sources provide relevant information; and what information was not readily available on the IRS website for the four compliance areas likely to affect IRA owners with unconventional assets. Appendix II describes in more detail the information available and the information lacking in Publications 590-A and 590-B and other IRS sources. Given the complexity of the four compliance topics we identified as well as the relatively few numbers of taxpayers affected and the already large publication size, it may not be feasible to provide complete information on these topics within Publications 590-A and 590-B. IRS publications (like 590-A and 590-B) are intended to explain the law in plain language for taxpayers and their advisors. They generally summarize and translate into layperson’s terms more complex and technical information from authoritative sources like the Internal Revenue Code and more authoritative guidance like tax regulations, revenue procedures, and revenue rulings. IRS analysis indicates that perhaps only about 2 percent of IRAs have invested in hard-to-value unconventional assets. However, even small numbers of taxpayers with particular circumstances have the right to know what they need to do to comply with tax laws. IRA owners with unconventional assets who turn to Publications 590-A and 590-B are unlikely to fully understand how certain IRA investment decisions can increase their risks for noncompliance. Misunderstanding the rules governing IRAs could result in increased tax liability for taxpayers making unintentional errors and jeopardize their retirement savings. Given the serious consequences that could result for a taxpayer found to be noncompliant, IRS’s current publications are not clearly providing information for IRA owners with unconventional assets. Adding information to Publications 590-A and 590-B would be one solution that IRS could explore, but we recognize that it may not be practical for IRS to add substantially more information to Publications 590-A and 590-B for a relatively small percentage of IRA owners. Alternatives to adding more pages to Publications 590-A and 590-B could include directing readers with questions about rules affecting unconventional IRA assets to other IRS resources, such as IRS web pages or tax regulations that contain more technical and specialized information. As shown in table 2 above, we found some additional information on IRS web pages that would be helpful to IRA owners with unconventional assets. Adding language in Publication 590-A or 590-B directing taxpayers to specific web page URL addresses for additional information could help taxpayers more easily locate this information. For more technical or specialized information, IRS could direct readers of Publications 590-A and 590-B to the relevant sections of the Internal Revenue Code and related tax regulations. This additional information could help IRA owners better understand and navigate the potential compliance challenges associated with certain types of unconventional assets. Insufficient Data and Fragmented Expertise across IRS Organizational Units Complicate Enforcement of IRA Rules Involving Unconventional Assets IRS Cross-Divisional Team Identified Risks of IRA Noncompliance Based on Different Asset Types In October 2017, the Deputy Commissioner for Service and Enforcement commissioned a cross-divisional team comprised of representatives from all four IRS operating divisions to identify, assess, and mitigate risks of IRA noncompliance. In its February 2018 interim presentation, the IRS cross-divisional team categorized potential noncompliance risks over an IRA life cycle into two mitigation strategies, which are summarized below. 1. Noncompliance risks for most contribution and distribution IRA rules can be mitigated systemically through automated enforcement. For example, IRS can detect excess IRA contribution deductions and unreported IRA distributions by matching information from taxpayer returns with information reported by custodians. For the large population of IRA owners investing in conventional assets held by custodians, IRS relies on automated enforcement. 2. Noncompliance risks associated with the small population of IRAs with hard-to-value unconventional assets or under direct control of the IRA owner are generally mitigated through case-by-case audits. For example, noncompliance with the complex rules governing prohibited transactions and unrelated business income is generally not reflected on individual tax returns. Some custodians rely on IRA owners to provide asset value information and may not have complete and accurate data to report to IRS. Undervaluing IRA assets hampers automated enforcement, for example, to detect excess contributions and taxable distributions. Noncompliance involving IRAs with unconventional assets is generally detected through labor-intensive audits of individual taxpayers. IRS’s SB/SE division uses field audits to pursue complex individual tax return cases, including those that could involve IRAs with unconventional assets. In February 2018, an IRS cross-divisional team that studied the risks of IRA noncompliance reported that, from fiscal years 2012 to 2016, IRS audited about 26,000 tax returns with IRA issues. IRS officials provided us examples of SB/SE job aides and training materials designed to help examiners recognize different types of noncompliance associated with IRAs invested in unconventional assets. For example, the job aides provide instructions on prohibited transactions, barred collectibles, and FMV issues involving IRAs. When interviewing taxpayers, examiners are instructed to ask a series of questions covering subjects such as: what kind of advice the taxpayer received from promoters or custodians of self-directed IRAs, whether the taxpayer had direct involvement in purchasing unconventional assets through a control feature known as “checkbook access,” whether the taxpayer has a limited liability company (LLC) tied to the how the taxpayer determined the FMV of unconventional assets. IRS officials told us that enforcing rules associated with IRAs investing in unconventional assets can be particularly challenging for investments involving LLCs or special partnership arrangements. An IRA owner may establish an LLC that is owned by the IRA. Once the LLC is set up, a business checking account is linked to the IRA funds and the account owner is named the manager of the LLC with control over the checkbook. This allows IRA owners to purchase assets directly from investment sponsors without having to wait for custodians to execute a purchase or sale. The LLC may be used to invest in businesses that could generate unrelated business income. According to IRS officials, prohibited transactions may also be more likely to occur when custodians allow “checkbook” access to IRAs, in part because the marketing of this IRA structure is appealing to individuals who want less oversight of their IRA transactions and are more likely to intentionally engage in self-dealing transactions. IRS examination officials told us that the 3-year statute of limitations for assessing taxes owed remains an obstacle in pursuing noncompliance that may span the many years of an IRA investment. For example, abuses involving prohibited transactions frequently are not reflected on any filed tax return and may be difficult to detect within the general 3-year statute of limitations period. IRS agreed with our October 2014 recommendation for the Commissioner to work in consultation with the Department of the Treasury (Treasury) on a legislative proposal to expand the statute of limitations on IRA noncompliance. IRS said Treasury is aware of IRS’ support for changing the limitation period for IRA noncompliance. Treasury reviews and presents the administration’s tax proposals and has not released a legislative proposal as of October 2019. Data Collection Has Improved, but Opportunities Exist to Further Strengthen Identification of Potentially Abusive IRAs With electronically compiled data for tax year 2016 filed in 2017, IRS was positioned for the first time to quantify the number of IRAs with specified types of hard-to-value assets. IRS officials said that even with the new custodian reporting, the broad IRA asset type data alone may be inadequate for improving audit selection criteria and identifying potentially abusive IRAs in a timely manner. In February 2018, using the newly available data, an IRS cross-divisional team identified that about 2 million IRAs included one or more types of hard-to-value assets for tax year 2016. However, custodians reported an FMV dollar amount for hard-to- value assets for only 1.6 million of those IRAs, as shown in table 3. The combined FMV was approximately $137 billion. As shown in table 3, about 400,000 (about 20 percent) of the Form 5498s reporting that the IRA held investments in one or more of the specified unconventional categories were missing the 2016 FMV dollar amount for those assets. The cross-divisional team identified that undervaluation risk affects custodian reporting. IRS officials said that the team did not review the custodian reporting patterns as part of its initial analysis of the 2016 Form 5498 data. Forthcoming tax regulations on IRAs may help to improve custodian reporting of FMVs on Form 5498. IRS officials told us that the new IRA regulations would address FMV for certain categories of hard-to-value unconventional assets. IRS officials also told us that it would be premature to publish new guidance for IRA owners and custodians on the FMV of unconventional assets until the new regulations are issued. The tax year 2016 Form 5498 information indicated about 141,000 IRAs invested in LLCs—an asset type which IRS has determined presents greater noncompliance risk. Prior to the newly available asset type data, SB/SE conducted an interim Compliance Initiative Project (CIP) using external state government information to identify businesses, including LLCs and partnerships, owned by IRAs as a way to select IRA owners for audit. Completed in October 2019, the interim compliance research revealed that audits detecting prohibited transactions can result in substantial tax adjustments. In September 2018, SB/SE approved a new CIP using the asset type data from Form 5498s for tax year 2017 to select a sample of traditional and Roth IRAs that had an ownership in an LLC or real estate. The latest compliance research field work began in February 2019 and is to be completed in January 2021. IRS officials told us they plan to use this research in combination with the interim research results to improve criteria for selecting tax returns with IRAs at greater risk of noncompliance for audit. To detect abusive transactions, IRS can require taxpayers to self-report certain transactions that have been used by other taxpayers to avoid taxes. Transactions become “reportable” (meaning a taxpayer must report it to IRS) when IRS designates them as a “listed transaction” or “transactions of interest.” Listed Transaction. A listed transaction is reportable when it is the same or substantially similar to one of the types of transactions that IRS has determined to be an avoidance transaction. In 2004, IRS determined that Roth IRA “stuffing” is an abusive tax avoidance transaction that taxpayers must report to IRS as a listed transaction. “Stuffing” involves shifting value through transactions that disguise Roth IRA contributions exceeding annual IRA limits, such as selling receivables at less than FMV to a Roth IRA, or other transactions between a closely-held business in which the Roth IRA invests and another closely-held business of the Roth IRA owner. Transaction of Interest. A transaction of interest is one that IRS and Treasury believe to have the potential for tax avoidance or evasion, but which lacks enough information for IRS and Treasury to determine whether the transaction should be identified as a tax avoidance transaction. As of December 2019, IRS has not identified or classified any IRA asset types or investment transactions as reportable transactions of interest. Taxpayers are required to disclose all types of reportable transactions on Form 8886, Reportable Transaction Disclosure Statement. Similarly, advisers helping taxpayers conduct reportable transactions are required to file Form 8918, Material Advisor Disclosure Statement. Results from the ongoing IRS compliance research may yield insights about existing and emerging abusive schemes involving IRAs. This information could be useful for evaluating the feasibility of requiring greater disclosure by IRA owners and their custodians and advisors. For example, IRS could consider requiring reporting of known abusive IRA arrangements and prohibited transactions as listed transactions. Also, IRS could explore disclosure of high-risk IRA asset types susceptible to gross valuation misstatements, such as LLCs, as transactions of interest. We recently found that IRS’s Research, Analysis and Statistics office had developed the capability to analyze the narrative fields of tax forms. Additional disclosure of potentially abusive IRA transactions coupled with greater use of tax form’s narrative fields may help IRS to select IRA owner tax returns for more detailed review. The cases identified by such detailed review would help IRS better allocate limited audit resources. Enforcing IRA Rules for Unconventional Assets Draws on Expertise and Roles of Multiple IRS Organizational Units Responsibility for addressing IRA noncompliance detected through case- by-case audits is fragmented among multiple IRS organizational units. This fragmentation creates challenges for IRS examiners from different units that may need to share expertise and collaborate on enforcement of complex rules applicable to IRAs that invest in unconventional assets. In February 2018, the IRS cross-divisional team concluded that no one IRS operating division alone can effectively identify and penalize IRA noncompliance regarding unrelated business income and undervaluation of unconventional assets. Unrelated business income. SB/SE and TE/GE officials told us that detecting unrelated business income unreported by an IRA can also require the involvement of multiple IRS divisions. IRS responsibility and expertise in detecting noncompliance with the rules for unrelated business income resides in IRS’s TE/GE division. TE/GE is responsible for enforcing the unrelated business income taxation rules across tax-exempt organizations. Its Exempt Organizations group audits Form 990-T filed by tax- exempt charities and its examiners are required to check if tax exempt charities have reported unrelated business income. Examiners in TE/GE’s Employee Plans group have been trained on how to determine if a tax-exempt employee retirement plan has engaged in activities that constitute unrelated trade or business. SB/SE has primary responsibility for auditing individuals owning IRAs, and its examiners are to verify that all returns within the taxpayer’s sphere of influence are filed. IRS officials told us that when SB/SE examiners discover potential unrelated business income issues when reviewing an individual taxpayer’s IRAs, those examiners can seek assistance from TE/GE examiners via an internal Specialist Referral System used to refer cases to other divisions. Although IRS officials described to us how SB/SE examiners, at their own initiative, can seek out expertise on unrelated business income, the topic is not addressed in SB/SE examiner training materials and job aids on auditing IRAs with unconventional assets. SB/SE officials provided us training slides used to teach examiners how to recognize excess contributions, prohibited transactions, barred collectibles, and valuation issues involving IRAs. While the slides instruct examiners to contact a Senior Program Analyst or Counsel for assistance with complicated issues or cases, there is no information educating SB/SE examiners about unrelated business income or informing examiners that specialized knowledge about this topic resides in the TE/GE division. Without resources, such as training materials or job aides, that provide such information, SB/SE examiners carrying out the ongoing compliance initiative project are not positioned to surface unrelated business income tax issues for referral to TE/GE. Given that IRS plans to use those research results to refine its audit selection criteria, IRS is missing an opportunity to learn more about IRA noncompliance with unrelated business income taxation. Undervaluation of unconventional assets. In February 2018, the cross-divisional IRA team cited undervaluation of unconventional assets as another compliance risk that involves the expertise and enforcement responses from multiple IRS units. If SB/SE examiners determine in auditing an IRA owner that the IRA custodian had inaccurately reported IRA asset values, other IRS divisions can take action against the custodian. LB&I can penalize a large financial institution custodian, although the cross-divisional IRA team reported the $50 penalty for filing an incorrect Form 5498 poses little deterrent effect. For the approximately 75 non-bank IRA trustees approved by IRS, TE/GE can revoke a non-bank’s trustee status for violating any fiduciary, accounting, or financial requirements. The cross-divisional IRA team explored an approach for joint examination to more effectively identify and penalize noncompliance associated with prohibited transactions, unreported unrelated business income, and undervaluation of IRA assets. Based on knowledge from prior examinations, the team identified a small subset of non-bank trustees publicly marketing alternative investments that held IRAs more than $5 million in reported FMV as of tax year 2016. As of February 2018, the team reported that it had been premature for the separate divisions to commit examination resources. As of October 2019, IRS officials said they plan to reconvene the cross-divisional IRA team after the ongoing SB/SE compliance initiative project is complete in 2021. IRS officials said the plan is for the team to use the compliance research results to refine audit selection. Also, the team could continue work on establishing a joint examination approach for IRA noncompliance associated with hard-to-value unconventional assets. Conclusions IRA owners that invest in unconventional assets—such as real estate, certain precious metals, virtual currency, or private equity—assume greater responsibility for navigating complex rules that govern tax-favored retirement investments. To understand these rules, taxpayers are likely to consult IRS Publications 590-A and 590-B. While this two-part publication provides some information on compliance issues likely to affect IRA owners with unconventional assets, the information in the publication as well as on IRS web pages is limited. By assessing options for making such information clearer, IRS could better inform taxpayers and help them comply. This is particularly important because misunderstanding the rules governing IRAs can result in increased tax liability for these taxpayers and jeopardize their retirement savings. Noncompliance associated with nonpublicly traded IRA assets has been difficult for IRS to detect and time consuming to pursue. In contrast to automated enforcement for IRAs with conventional investments, noncompliance involving IRAs with unconventional assets is generally detected on a case-by-case basis through labor-intensive audits of individual taxpayers. In recent years, IRS has begun collect information from IRA custodians that IRS can use to quantify the dollar amounts of specified types of hard-to-value assets held by IRAs. However, the broad IRA asset type data alone may not be sufficient for audit selection and identifying potentially abusive IRAs in a timely manner. When IRS lacks sufficient data to detect abusive transactions, IRS can require taxpayers to self-report certain transactions that have been used by other taxpayers to avoid taxes. Additional disclosure of certain IRA transactions coupled with mining the narrative fields of tax forms could help IRS to efficiently identify potentially abusive IRA activity and better allocate limited audit resources. Fragmented responsibility among IRS operating divisions creates additional challenges for IRA enforcement. The division responsible for tax-exempt entities trains its examiners on how to determine if an employee retirement plan has unrelated business activities subject to taxation. Yet, examiners in the division that audits complex individual tax returns, including those involving IRAs, do not receive similar training. Training for those examiners on unrelated business income tax issues, and how examiners can refer those cases to other divisions for assistance, could help improve collaboration on IRA enforcement. Recommendations for Executive Action We are making the following three recommendations to IRS: The Commissioner of Internal Revenue should assess options for updating Publications 590-A and 590-B to either include more information or direct taxpayers to other resources for IRA owners with investments in unconventional assets. Such information could include: storage requirements for IRA investments in certain precious metals; valuation methods for hard-to-value IRA assets; the Department of Labor’s process for granting exemptions to IRA prohibited transactions rules; and IRA investments with the potential to create unrelated business income tax liabilities. (Recommendation 1) The Commissioner of Internal Revenue, building on forthcoming compliance research using new IRA asset data, should evaluate the feasibility of requiring disclosure for high-risk IRA asset types associated with abusive schemes as transactions of interest. (Recommendation 2) The Commissioner of Internal Revenue should develop resources (such as training materials or job aids) for Small Business/Self-Employed examiners conducting IRA owner audits that explain how IRAs with unconventional assets can generate unrelated business income tax liability, and how examiners can refer cases to unrelated business income experts in IRS for assistance. (Recommendation 3) Agency Comments We provided a draft of this report to the Treasury and IRS for review and comment. In its comments, reproduced in appendix III, IRS generally agreed with our recommendations. For recommendation 1, IRS said it will review its educational publications and web pages for appropriate updates within the scope of the tax code. For recommendation 2, IRS said that it will determine whether there are abusive schemes associated with certain IRA asset types, and if the data indicate such a correlation, it will evaluate the feasibility of requiring disclosure of such arrangements as transactions of interest. For recommendation 3, IRS said it will review and update resources for examiners conducting IRA owner audits, including guidance on how to address unrelated business income tax (UBIT). It will incorporate guidance for agents on how to refer such cases to UBIT experts when assistance is needed. IRS also said that it will renew its efforts at ensuring collaboration with relevant subject matter experts. IRS in consultation with Treasury also provided technical comments which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of the Treasury, the Commissioner of Internal Revenue, the Secretary of Labor, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact James R. McTigue, Jr. at (202) 512-9110 or Charles A. Jeszeck at (202) 512-7215. You may also reach us by email at jeszeckc@gao.gov or mctiguej@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff making key contributions to this report are listed in appendix IV. Appendix I: Status of GAO Recommendations Appendix II: IRS Information for IRA Owners Investing in Unconventional Assets This appendix describes: what information for individual retirement account (IRA) owners with unconventional assets can be found in Publications 590-A and 590-B, what other Internal Revenue Service (IRS) sources provide relevant information, and what information was not readily available on the IRS website for the four compliance areas we identified through prior work as likely to affect IRA owners with unconventional assets. The information below does not include the Internal Revenue Code or detailed and technical resources published in the weekly Internal Revenue Bulletin, such as tax regulations, revenue rulings, and revenue procedures. Barred investments Publications 590-A and 590-B explain what types of IRA investments are barred, such as collectibles, but the publication does not have additional information that could be useful to IRA owners with allowable investments in coins and bullion. The publications define collectibles as including artworks, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, and certain other tangible personal property. The publications explain that if a traditional IRA invests in collectibles, the amount invested is considered distributed, and that the IRA owner could be subject to an additional tax on early distributions. Publications 590-A and 590-B further explain that an exception exists for IRA investments in certain types of coins and bullion. However, the two-part publication does not indicate that certain types of bullion must be stored by a bank or an IRS-approved non-bank trustee. The two-part publication also does not mention that IRA investments in life insurance contracts are not permitted. Two IRS web pages listing frequently asked questions (FAQs) about retirement plans contain additional information about bullion storage requirements and IRA investments in life insurance contracts. Both web pages state that investing IRA funds in life insurance contracts and collectibles are prohibited, and they also note the exception for certain precious metals. One of the web pages further explains that allowable bullion must be stored with a bank or an IRS-approved non-bank trustee. Prohibited transactions Publications 590-A and 590-B define prohibited transactions in general terms, list examples, and explain the consequences of engaging in a prohibited transaction. The two-part publication also cautions that the risk of engaging in a prohibited transaction in connection with an IRA account may be increased when an IRA owner invests in nonpublicly traded assets or assets that an IRA owner directly controls. However, the publication does not provide any information about applying for an exception to the prohibited transaction rules. We found some limited information about exemptions to the prohibited transaction rules on an IRS web page entitled “Retirement Plan Investments FAQs.” The web page explains that the Department of Labor (DOL) has granted class exemptions for certain types of investments under specific conditions, and that a plan sponsor may apply to DOL to obtain an administrative exemption for a particular proposed transaction that would otherwise be prohibited. However, the web page does not provide any links to DOL information such as a DOL publication that explains the prohibited transactions exemption process. Unrelated business income In February 2018, IRS updated Publications 590-A and 590-B to include information about IRAs with unrelated business income. Publications 590- A and 590-B now explain that an IRA is subject to tax on unrelated business income if the IRA carries on an unrelated trade or business. Publications 590-A and 590-B state that the IRA trustee is required to file a Form 990-T if an IRA has $1,000 or more of unrelated trade or business gross income. For more information, Publications 590-A and 590-B direct taxpayers to consult Publication 598, Tax on Unrelated Business Income of Exempt Organizations. Publication 598 lists IRAs as one of many exempt entities subject to taxes on unrelated business income, and the requirement to file Form 990-T for gross income of $1,000 or more. Publication 598 describes dozens of activities by tax-exempt organizations that would be considered an unrelated business; but the publication does not include any examples specific to IRA investments that could also be considered unrelated business activities and subject to taxes. Our search did not find additional information on IRS.gov relating to IRAs and unrelated business income taxes. Fair market value (FMV) Publications 590-A and 590-B do not provide guidance about how to accurately determine the FMV of hard-to-value unconventional assets. IRS requires custodians to report (on Form 5498) an IRA’s FMV at year’s end as well as some additional information for IRAs with unconventional assets. The instructions for completing Form 5498 explain that IRA custodians are responsible for ensuring that “all IRA assets (including those not traded on established markets or not having a readily determinable market value) are valued annually at their FMV.” However, neither the form’s instructions nor Publications 590-A and 590-B provide guidance or tips on how to determine the FMV of non-publicly traded or other hard-to-value assets. As we previously reported, some unconventional assets may require a third-party appraisal to determine their FMV. One IRS web page titled, “Valuation of Plan Assets at Fair Market Value,” provides some additional FMV information but it is intended more for the valuing assets in employer-provided retirement benefits like traditional pensions and 401(k) plans. The web page states that an accurate assessment of the FMV of retirement plan assets is essential for complying with Internal Revenue Code requirements and avoiding prohibited transactions. The web page also states that for defined contribution plans like a 401(k) plan, investments must be valued at least once per year in accordance with a consistent and uniform method. For traditional pensions (defined benefit plans), tax regulations define FMV for purposes of valuing plan assets as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” The Department of the Treasury (Treasury) plans to issue regulations on IRAs. IRS officials told us that these new regulations would address FMV for certain categories of hard-to-value unconventional assets. IRS officials also told us that it would be premature to publish new guidance for IRA owners and custodians on the FMV of unconventional assets until the new regulations are issued. In their October 2019 update of planned guidance projects, Treasury’s Office of Tax Policy and IRS listed planned IRA regulations. Appendix III: Comments from the Internal Revenue Service Appendix IV: GAO Contacts and Staff Acknowledgments GAO Contacts Staff Acknowledgments In addition to the contacts named above, MaryLynn Sergent and David Lehrer (Assistant Directors), Ted Burik, Susan Chin, Steven Flint, Emily Gruenwald, Mark Kehoe, Jungjin Park, and David Reed made key contributions to this report. James Bennett, Amy Bowser, Jacqueline Chapin, Edward J. Nannenhorn, Andrew J. Stephens, Walter Vance, and Adam Wendel also provided support.


T he Constitution contains three provisions that mention the term "emolument": 1. The Foreign Emoluments Clause . Article I, Section 9, Clause 8 provides that "no Person holding any Office of Profit or Trust under [the United States], shall, without the Consent of Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State"; 2. The Domestic Emoluments Clause . Article II, Section 1, Clause 7 provides that "[t]he President shall, at stated Times, receive for his Services, a Compensation, which shall neither be encreased nor diminished during the Period for which he shall have been elected, and he shall not receive within that Period any other Emolument from the United States, or any of them"; and 3. The Ineligibility Clause. Article I, Section 6, Clause 2 provides (among other things) that no Member of Congress shall "be appointed" during his or her term "to any civil Office under the Authority of the United States, which shall have been created, or the Emoluments whereof shall have been encreased during such time[.]" The first two of these Clauses are the focus of this report. For most of their history, the Foreign and Domestic Emoluments Clauses (collectively, the Emoluments Clauses or the Clauses) were little discussed and largely unexamined by the courts. Recent litigation involving the President, however, has led to multiple federal court decisions more fully addressing the Clauses' scope and application. This report accordingly provides an overview of the Emoluments Clauses as they relate to the President, focusing on the legal issues that have been central to the recent litigation. More specifically, this report discusses (1) the history and purpose of the Clauses; (2) whether the President is a person holding an "Office of Profit or Trust under [the United States]" for purposes of the Foreign Emoluments Clause; (3) the scope of the Emoluments Clauses, focusing specifically on disputes over the breadth of the term "emolument"; and (4) how the Clauses may be enforced. History and Purpose of the Emoluments Clauses Founding Era Foreign Emoluments Clause The Foreign Emoluments Clause's basic purpose is to prevent corruption and limit foreign influence on federal officers. At the Constitutional Convention, Charles Pinckney of South Carolina introduced the language that became the Foreign Emoluments Clause based on "the necessity of preserving foreign Ministers & other officers of the U.S. independent of external influence." The Convention approved the Clause unanimously without noted debate. During the ratification debates, Edmund Randolph of Virginiaâa key figure at the Conventionâexplained that the Foreign Emoluments Clause was intended to "prevent corruption" by "prohibit[ing] any one in office from receiving or holding any emoluments from foreign states." The Clause reflected the Framers' experience with the then-customary European practice of giving gifts to foreign diplomats. Following the example of the Dutch Republic, which prohibited its ministers from receiving foreign gifts in 1651, the Articles of Confederation provided that "any person holding any office of profit or trust under the United States, or any of them" shall not "accept of any present, emolument, office, or title of any kind whatever, from any king, prince, or foreign state." The Foreign Emoluments Clause largely tracks this language from the Articles, although there are some differences. During the Articles period, American diplomats struggled with how to balance their legal obligations and desire to avoid the appearance of corruption, against prevailing European norms and the diplomats' wish to not offend their host country. A well-known example from this period, which appears to have influenced the Framers of the Emoluments Clause, involved the King of France's gift of an opulent snuff box to Benjamin Franklin. Concerned that receipt of this gift would be perceived as corrupting and violate the Articles of Confederation, Franklin sought (and received) congressional approval to keep the gift . Following this precedent, the Foreign Emoluments Clause prohibits federal officers from accepting foreign presents, offices, titles, or emoluments, unless Congress consents. Domestic Emoluments Clause The Domestic Emoluments Clause's purpose is to preserve the President's independence from Congress and state governments. To accomplish this end, the Clause contains two key provisions. First, it provides that the President shall receive a compensation for his services, which cannot be increased or decreased during his term, thus preventing Congress from using its control over the President's salary to exert influence over him. To preserve presidential independence further, the Clause provides that, apart from this fixed salary, the President shall not receive "any other Emolument" from the United States or any state government. In light of its purpose, the Domestic Emoluments Clauseâunlike the Foreign Emoluments Clauseâdoes not permit Congress to assent to the receipt of otherwise prohibited emoluments from the state or federal governments. The Domestic Emoluments Clause, which drew upon similar provisions in state constitutions, received little noted debate at the Constitutional Convention. Its meaning, however, was elucidated by Alexander Hamilton in The Federalist No. 73 . Hamilton wrote that the Domestic Emoluments Clause was designed to isolate the President from potentially corrupting congressional influence: because the President's salary is fixed "once for all" each term, the legislature "can neither weaken his fortitude by operating on his necessities, nor corrupt his integrity by appealing to his avarice." Similarly, Hamilton explained that because "[n]either the Union, nor any of its members, will be at liberty to give . . . any other emolument," the President will "have no pecuniary inducement to renounce or desert the independence intended for him by the Constitution." Other Framers echoed this sentiment during the ratification debates. Nineteenth and Twentieth Century Practice The Foreign Emoluments Clause provides a role for Congress in determining the propriety of foreign emoluments, in that receipt of an emolument otherwise prohibited by the Clause is permitted with the consent of Congress. Under this authority, Congress has in the past provided consent to the receipt of particular presents, emoluments, and decorations through public or private bills, or by enacting general rules governing the receipt of gifts by federal officers from foreign governments. For example, in 1966, Congress enacted the Foreign Gifts and Decorations Act, which provided general congressional consent for foreign gifts of minimal value, as well as conditional authorization for acceptance of gifts on behalf of the United States in some cases. Several Presidents in the 19th centuryâsuch as Andrew Jackson, Martin Van Buren, John Tyler, and Benjamin Harrison ânotified Congress of foreign presents that they had received, and either placed the gifts at its disposal or obtained consent to their receipt. Other 19th century Presidents treated presents that they received as "gifts to the United States, rather than as personal gifts." Thus, in one instance, President Lincoln accepted a foreign gift on behalf of the United States and then deposited it with the Department of State. In the 20th century, some Presidents have sought the advice of the Department of Justice's Office of Legal Counsel (OLC) on whether acceptance of particular honors or benefits would violate the Emoluments Clauses. Three such OLC opinions addressed whether (1) President Kennedy's acceptance of honorary Irish citizenship would violate the Foreign Emoluments Clause; (2)Â President Reagan's receipt of retirement benefits from the State of California would violate the Domestic Emoluments Clause; and (3)Â President Obama's acceptance of the Nobel Peace Prize would violate the Foreign Emoluments Clause. Persons Subject to the Emoluments Clauses An important threshold issue in examining the Emoluments Clauses is determining who is subject to their terms. The scope of the Domestic Emoluments Clause is clear: it applies to "[t]he President." The Clause prohibits the President from receiving emoluments from state or federal governments, aside from his fixed federal salary. The Foreign Emoluments Clause applies to any person holding an "Office of Profit or Trust under [the United States]." OLC, which has developed a body of opinions on the Emoluments Clauses, has opined that the President "surely" holds an "Office of Profit or Trust" under the Constitution. OLC opinions are generally considered binding within the executive branch. There has been significant academic debate about whether OLC's conclusion comports with the original public meaning of the Foreign Emoluments Clause. Some legal scholars have argued that the Foreign Emoluments Clause does not apply to elected officials such as the President, but only to certain appointed federal officers. Other scholars support OLC's view that the President holds an office of profit and trust under the United States under the original meaning of the Foreign Emoluments Clause. In addition to textual and structural arguments, these scholars debate the significance of Founding-era historical evidence. To support the view that the Foreign Emoluments Clause does not apply to the President, academics have observed that, among other things, (1) a 1792 list produced by Alexander Hamilton of "every person holding any civil office or employment under the United States" did not include elected officials such as the President and Vice President; (2)Â George Washington accepted gifts from the Marquis de Lafayette and the French Ambassador while President without seeking congressional approval; and (3)Â Thomas Jefferson similarly received and accepted diplomatic gifts from Indian tribes and foreign nations, such as a bust of Czar Alexander I from the Russian government, without seeking congressional approval. On the other side of the debate, scholars have observed that, among other things, (1) during Virginia's ratification debates, Edmund Randolph directly stated that the Foreign Emoluments Clause applies to the President; (2) George Mason, another Framer, articulated a similar view in those same debates; and (3) Alexander Hamilton, discussing the dangers of foreign influence on republics in The Federalist No. 22 , stated that this concern extends to a republic's elected officials. Beyond examining contemporaneous historical evidence of the Foreign Emoluments Clause's original public meaning, other evidence (such as text, precedent, and settled practice) is often usedâat least by some juristsâto inform constitutional meaning and interpretation. As a textual matter, both the Constitution itself and contemporaneous sources refer to the Presidency as an "Office." The President receives compensation for his service in office (that is, "Profit") and is tasked with many important constitutional duties (that is, "Trust"). Furthermore, as discussed earlier, historical practice from the 19th and 20th centuries could support the view that the President is subject to the Foreign Emoluments Clause. Unlike Washington's and Jefferson's actions, several 19th century Presidents notified Congress or sought congressional approval upon receipt of gifts by foreign governments. Finally, the common practice among recent Presidents of placing their financial interests in a blind trust or its equivalent could reflect a concern that presidential financial holdings may implicate the Foreign Emoluments Clause. The parties in recent litigation involving the Emoluments Clauses have not disputed that the Foreign Emoluments Clause applies to the President. A single district court decision has reached the merits of this issue. Weighing the evidence discussed above, that court held that "the text, history, and purpose of the Foreign Emoluments Clause, as well as executive branch precedent interpreting it, overwhelmingly support the conclusion" that the Foreign Emoluments Clause applies to the President. This case is currently on appeal before the full Fourth Circuit. The Meaning of "Emolument" A key disputed issue regarding the scope of the Emoluments Clauses is what constitutes an "emolument." This question has divided legal scholars and has only recently been addressed by any federal courts. Scholars, courts, and executive branch agencies have offered several potential definitions of "emolument": 1. Office-related definitions . Black's Law Dictionary defines an "emolument" as an "advantage, profit, or gain received as a result of one's employment or one's holding of office." Some scholars argue that this employment- or office-centric definition of the term is the definition encompassed by the Emoluments Clauses, meaning that the Clauses prohibit covered officials from receiving compensation "for the personal performance of services" as an officer or employee but do not bar "ordinary business transactions" between a covered official and government. 2. Any "profit, gain, advantage, or benefit . " Others argue that the term "emolument" is broader in scope, applying to any profit, gain, advantage, or benefit. Under this broader conception, even "ordinary, fair market value transactions" between a covered official and foreign or domestic governments would be prohibited. Two recent district court decisions adopted this broader definition of "emolument." 3. Functional or purpose-based d ef initions. Both the Department of Justice's OLC and the Comptroller General of the United States, on behalf of the Government Accountability Office (GAO), have issued opinions on whether the acceptance of particular payments, benefits, or positions would implicate the Emoluments Clauses. These opinions have at times appeared to adopt a fact-specific, functional view of the Clauses, focusing on the purpose and potential effect of the specific payments or benefits at issue as they relate to the Clauses' goals of limiting influence on the President and federal officers. The relevant assessment in some of these opinions has appeared to be whether the payments or benefits are intended to or could "influence . . . the recipient as an officer of the United States" under the totality of the circumstances. At least one commentator has asserted that the OLC and GAO opinions support a middle view that Presidents or other federal officers may receive "certain fixed benefits" without those benefits being considered emoluments so long as they are not "subject to foreign or domestic government manipulation or adjustment in connection with" the office. Debates over the scope of the Clauses have largely centered on their text, their history and purpose, and historical practice. With respect to text, for instance, proponents of a broad definition emphasize the use of the word "any" in both Clauses and the phrase "any kind whatever" in the Foreign Emoluments Clause. They also contrast those provisions with the limiting term "whereof" that links emoluments to "civil Office" in the Ineligibility Clause (the provision that limits the ability of Members of Congress to hold dual positions). But proponents of a narrower, office- or employment-limited definition note that the word "any" in the Clauses may simply be read as extending coverage to multiple forms of emoluments (beyond just monetary remuneration). They further assert that the use of "emolument" in the Ineligibility Clause is clearly tied to an office-based definition and supports applying the same definition to the other provisions. As for the Clauses' history and purpose, both sides point to dictionary definitions and other uses of the word (including by Framers) contemporaneous with the Constitution's drafting to support their preferred definition. Proponents of a broad definition also argue that statements about the general anti-corruptive purpose of the Clauses support reading it expansively, while proponents of an office- or employment-limited definition assert that the Clauses were the product of a "balancing of values" that included attracting candidates for federal service who may have had conflicting commercial interests. As for the corpus of OLC and GAO opinions interpreting the Clauses, proponents of the broader and narrower definitions both cite opinions that they argue support their favored definitions. In 2018 and 2019, two federal district courts substantively addressed the Emoluments Clauses' scope for the first time. Both courts concluded that the term "emolument" as used in the Clauses "is broadly defined as any profit, gain, or advantage." As to the Clauses' text, the courts found significant the use of "expansive modifiers" like "any other" and "any kind whatever," and rejected the proposition that the term's office-related use in the Ineligibility Clause should control its use in the other Clauses. With respect to the Clauses' history and purpose, the courts, while acknowledging that broader and narrower definitions of "emolument" both existed at the time of ratification, found the weight of the historical evidence and the Clauses' "broad anti-corruption" purpose supported the more expansive definition. Finally, the courts viewed executive branch precedent and practice as "overwhelmingly consistent with .Â .Â . [an] expansive view of the meaning of the term 'emolument,'" observing that "OLC pronouncements repeatedly cite the broad purpose of the Clauses and the expansive reach of the term 'emolument.'" The recent court decisions construing the Emoluments Clauses are not final, however. In fact, as discussed below, one of the decisions was reversed by a panel of the Fourth Circuit on a separate issue regarding the standing of the plaintiffs to sue, and the full Fourth Circuit has agreed to consider the district court's rulings. The other decision has been certified for an immediate appeal to the District of Columbia Circuit. Thus, the import of these decisions is uncertain. Enforcement of the Clauses Separate from issues regarding the scope of the Emoluments Clauses is how the provisions' mandates are enforced, including whether and to what extent the federal courts and Congress have a role in addressing violations of the Clauses. A principal hurdle in recent litigation involving the President has been the doctrine of standing. Standing is a threshold limitation concerning whether the person or entity suing in federal court has a "right to make a legal claim or seek judicial enforcement of a duty or right." The limitation includes a constitutional component stemming from Article III of the U.S. Constitution, which limits the exercise of federal judicial power to "Cases" or "Controversies." The Supreme Court has interpreted this "case-or-controversy limitation" to require, among other things, that a litigant have "a personal stake in the outcome of the controversy" before the court. At a minimum, a plaintiff must establish that he or she has suffered a personal injury (often called an "injury-in-fact") that is actual or imminent and concrete and particularized. In other words, the injury cannot be "abstract," must affect the plaintiff in a "personal and individual way," and must actually exist or at least be "certainly impending" rather than merely possible in the future. The plaintiff must also show "a sufficient causal connection between the injury and the conduct complained of" (causation) and "a likelihood that the injury will be redressed by a favorable decision" (redressability). Recent lawsuits over the Emoluments Clauses have been filed in three federal courts by (1)Â private parties who argue they compete for business with properties related to the alleged violations of the Clauses, as well as a public interest organization (the "SDNY litigation"); (2)Â the State of Maryland and the District of Columbia (the "Maryland litigation"); and (3) over 200 Members of Congress (the "Congressional litigation"). Each set of plaintiffs implicate distinct legal issues and precedents related to standing. Private-party competitor plaintiffs rely on the notion of "competitor standing," which holds that an economic actor may have standing to challenge unlawful action that benefits a direct competitor in a way that increases competition in the relevant market. State plaintiffs also rely on a competitor standing theory and additionally assert harms to certain sovereign and "quasi-sovereign" interests of the state related to tax revenue, diminution of their sovereign authority, and the economic well-being of state residents in general. Finally, Members of Congress assert standing stemming from the alleged deprivation of their constitutionally prescribed opportunity to vote on the permissibility of particular emoluments under the Foreign Emoluments Clause, which implicates a unique set of standing principles that apply specifically to legislative plaintiffs. More broadly, regardless of the status or classification of the plaintiffs, the fact that a lawsuit involving the Emoluments Clauses seeks a court ruling on the constitutionality of the conduct of an official within another branch of the federal government means that courts must conduct an "especially rigorous" standing inquiry given underlying separation-of-powers concerns. Attempts by these various plaintiffs to sue for alleged violations of the Emoluments Clauses have thus far met with mixed results. With respect to private-party competitor plaintiffs, the district court in the SDNY litigation concluded that several such plaintiffs lacked standing because it was "wholly speculative" that any loss of business or increase in competition could be traced to alleged violations of the Emoluments Clauses rather than "government officials' independent desire to patronize [the] businesses" allegedly involved in those violations based on factors such as service and location. But the Second Circuit recently reversed the district court's ruling regarding the competitor plaintiffs, concluding that "a plaintiff-competitor who alleges a competitive injury caused by a defendant's unlawful conduct that skewed the market in another competitor's favor [has standing] notwithstanding other possible, or even likely, causes for the benefit going to the plaintiff's competition." As for state plaintiffs, a different district court concluded in the Maryland litigation that the State of Maryland and the District of Columbia (D.C.) had standing to sue as competitors based on their interests, along with the interests of their citizens, in hotels and event spaces that competed with a hotel in D.C. related to the alleged unconstitutional conduct. The court reasoned that, based on specific factual allegations regarding diversion of business to that hotel, the plaintiffs were "placed at a competitive disadvantage" because of violations of the Clauses that "unfairly skew[ed] the hospitality market" against them. Yet a panel of the Fourth Circuit reversed this decision, concluding that the theory of standing hinged on the proposition that government customers were patronizing the relevant hotel "because the [h]otel distributes profits or dividends" in violation of the Clauses "rather than due to any of the [h]otel's other characteristics." In the panel's view, such a proposition required "speculation into the subjective motives of independent actors . . . not before the court, undermining a finding of causation." The Fourth Circuit panel's decision has itself now been vacated, however, with the full Fourth Circuit agreeing to hear the case. Finally, as to Members of Congress, the district court in the Congressional litigation determined in 2018 that over 200 Members had standing to sue under the Foreign Emoluments Clause based on the deprivation of their "opportunity to exercise their constitutional right to vote on whether to consent prior to . . . acceptance of prohibited emoluments." Faced with Supreme Court precedent indicating that individual legislators generally lack standing to sue for institutional injuries that amount to "abstract dilution of institutional legislative power," but may have standing when their votes on specific items "have been completely nullified," the district court concluded that the Members alleging violations of the Foreign Emoluments Clause fell into the latter category. Central to the district court's decision in the Congressional litigation was its view that the Member-plaintiffs lacked an adequate legislative remedy for the alleged violations without court intervention. According to the court, although Congress as a whole could pass "legislation on the emoluments issue" to consent to or reject perceived emoluments, the political process would do nothing to address the deprivation of the Members' opportunity to give advance approval or disapproval of particular emoluments in the first instance. As with the court rulings on the definition of the term "emolument," the judicial decisions on standing to enforce the Emoluments Clauses are all subject to further review by the respective circuit courts. It is thus possible that the outcomes in some or all the opinions just described could change. If the effective split between the Second and Fourth Circuits on the viability of competitor standing theories as they relate to alleged violations of the Emoluments Clauses endures, Supreme Court review is also possible. Beyond standing, other doctrines may present potential roadblocks to judicial enforcement of the Clauses. For instance, though its continued vitality is questionable, the Supreme Court has traditionally applied a "zone of interests" test as a prudential aspect of the standing inquiry, which "denies a right of review if the plaintiff's interests are marginally related to or inconsistent with the purposes implicit in the constitutional provision" at issue. Applying this test in the context of the Emoluments Clauses, the district court in the SDNY litigation involving private competitors concluded that such competitors fell outside the zone of interests of the Clauses, because the Emoluments Clauses stemmed from "concern with protecting the . . . government from corruption and undue influence" and were not "intended . . . to protect anyone from competition." Another potential barrier is the political question doctrine, a separation-of-powers-based limitation on the ability of courts to hear disputes where there is, among other things, a "textually demonstrable constitutional commitment of the issue to a coordinate political department; or a lack of judicially discoverable and manageable standards for resolving it." In the SDNY litigation, the district court concluded that Congress's authority to "consent to violations" of the Foreign Emoluments Clause meant that Congress, rather than the judiciary, would be "the appropriate body to determine whether" the alleged conduct "infringes on that power." Reversing both these rulings, however, the Second Circuit recently concluded that (1) "a plaintiff who sues to enforce a law that limits the activity of a competitor satisfies the zone of interests test even though the limiting law was not motivated by an intention to protect entities such as plaintiffs from competition," and (2) the judiciary's responsibility to adjudicate alleged violations of the Constitution was not lessened by the "mere possibility that Congress might grant consent" to particular emoluments. The district courts in the Maryland litigation and the Congressional litigation likewise agreed that the zone of interests test and political question doctrine did not bar those suits. But like the other issues raised in recent litigation involving the Emoluments Clauses, further review of the application of these doctrines is possible. Ultimate resolution of the issues is thus uncertain and will likely depend on the nature of the plaintiff involved. If the courts lack jurisdiction to enforce the Emoluments Clauses, the political process would be the remaining avenue for enforcement. In this vein, Congress could seek to enforce the Emoluments Clauses through legislation, political pressure, or potentially impeachment and removal. For instance, given that the Foreign Emoluments Clause explicitly provides a role for Congress in evaluating the propriety of the receipt of foreign emoluments by federal officers, Congress may be empowered to create civil or criminal remedies for violations or establish prophylactic reporting requirements through legislation. Indeed, one bill from the 115th Congress would have required certain reports and divestiture of personal financial interests of the President posing a potential conflict of interest, among other things. Resolutions have also been introduced in the 115th and 116th Congresses objecting to perceived violations of the Foreign Emoluments Clause, as well as calling on the President to take certain actions based on alleged potential violations. That said, it is unclear whether legislative actions would provide an effective means to enforce the Emoluments Clauses against the President, given the possibility of veto and potential separation-of-powers objections. As noted above, the adequacy of these legislative options has been a central issue in the Congressional litigation as it relates to Members' standing, and the issue is subject to further review at the appellate level.


T he Constitution grants Congress enormous power and freedom to engage in what we now refer to as budgeting. First, the Constitution grants Congress the power of the purse but does not prescribe or require any specific budgetary legislation or budgetary outcomes. Further, the Constitution allows the House and Senate to determine the rules of their internal proceedings but does not prescribe or establish any budgetary rules or restrictions. Congress has thus developed certain types of budgetary legislation as well as rules and practices that govern the content and consideration of that budgetary legislation. This collection of budgetary legislation, rules, and practices is referred to as the congressional budget process. Some have criticized the current congressional budget process and the budget outcomes that it has produced and have suggested that Congress adopt a more long-term budget focus. There is no consensus on what is meant by long term . For example, advocates of biennial budgeting (i.e., two-year budget resolutions, two-year appropriations legislation) sometimes characterize a two-year cycle as long-term budgeting. Some view the current 10-year budget window (described below) as being a form of long-term budgeting, while others consider long-term budgeting to span a lengthier period, such as 30 years or 50 years. There is also no general consensus on what is required by long-term budgeting. Would it simply require Congress to stay informed of the long-term projections for spending, revenue, deficits, and debt? Would it require Congress to affirmatively vote annually on policies that are projected to continue year to year? Would it require Congress to adopt a long-term budget plan or long-term fiscal targets (e.g., debt-to-GDP ratio limits)? And if targets were agreed upon, would it require automatic triggers to enforce fiscal targets (e.g., automatic spending cuts or automatic tax increases)? Rationale for Long-Term Budgeting Members of Congress, the Administration, and outside groups have expressed concern over projected levels of deficits and debt. The Congressional Budget Office (CBO) recently stated that federal deficits and debt held by the public, which are higher than average, are projected to increase sharply over the next 30 years. CBO states that deficits would rise from 4.2% of gross domestic product (GDP) in 2019 to 8.7% in 2049. According to CBO, federal debt held by the public is currently 78% of GDP, significantly higher than the 50-year average of 42%. Under current law, budget deficits would cause the debt to be 92% of GDP by 2029 and 144% of GDP by 2049, which "would be the highest in the nation's history by far." If policymakers want debt in 2049 to equal its current share of GDP (78%), the deficit would need to be reduced by $400 billion every year until then, CBO has projected. Some have argued that the current congressional budget process has created, or at least exacerbated, the projected long-term deficit and debt challenges. One recurring criticism is that the process does not encourage or require the consideration of long-term budgetary outcomes. Some argue that the lack of a formal requirement for Congress to consider long-term budget outcomes discourages long-term planning and encourages policy outcomes that are desirable in the short term at the expense of the long-term budget situation. Further, they argue that the current process does not even deter or prohibit Congress from enacting legislation that worsens the long-term deficit and debt projections. They argue that Congress needs to adopt a long-term budget focus. This report provides information on existing resources and congressional rules related to a long-term budget focus. Challenges Associated with Long-Term Budgeting There are potential challenges or obstacles associated with the adoption of a long-term budget focus within the current congressional budget process. Many think of the budget as being decided annually, but most policies that dictate how much will be spent and collected are fixed. Mandatory spending makes up 70% of total spending, is generally set by laws enacted years or decades ago, and remains in effect without the need for annual congressional approval. (Mandatory spending includes Medicare, Social Security, Medicaid, and interest on the debt.) Likewise, the collection of revenue as prescribed by the tax code continues without the need for legislative action. These mandatory spending and revenue policies change only if Congress and the President enact legislation making such changes. Under current law, these fixed spending and revenue policies are projected to result in increasing deficits and debt. Many argue that addressing rising deficit and debt in the long term would require policy changes. Another challenge associated with long-term budgeting is that any projected levels of spending and revenue are inherently uncertain. The further out spending and revenue are projected, the more uncertain they become. For example, within CBO's long-term budget projections (referenced above), the agency notes that such projections are "very uncertain." CBO concludes that while debt as a percentage of GDP in 2049 would likely be much greater than it is today if current laws remain unchanged, many factors (e.g., labor force participation, productivity in the economy, interest rates on federal debt, and health care costs per person) may alter actual outcomes. Other challenges associated with long-term budgeting include the difficulty of budgeting for unforeseen events (such as military engagements, natural disasters, and downturns in the economy); underlying projection assumptions; and the problem of setting fiscal policy or establishing long-term goals that a future Congress may not support. Information Available to Congress on the Long-Term Budget Outlook Information and data are publicly available to assist Congress in understanding the projected long-term budget situation. Projections are available that show spending, revenue, deficits, and debt in the long term, and in some instances, data evaluating the long-term outlook of specific programs are available. Selected examples of that information are described below. General Budgetary Projections for the Upcoming 10-Year Period CBO regularly publishes budgetary and economic projections, which are formally known as the annual Budget and Economic Outlook but are often referred to in Congress as the annual baseline. These baseline projections cover a 10-year period, which is often referred to as the budget window. These projections are based on the assumption that current laws regarding federal spending and revenues will generally remain in place. The Budget and Economic Outlook includes information on projected spending, revenue, deficits, debt, economic growth, and alternative fiscal scenarios. Congress typically uses this baseline as a benchmark against which it measures legislative proposals. The Office of Management and Budget (OMB) also publishes budgetary and economic projections. As required by law, OMB includes information in the President's annual budget request on projected spending and revenue. Such projections typically span 10 years. In addition to the information provided on the 10-year budgetary outlook under current law, CBO provides Congress with cost estimates of certain proposed legislation. The Congressional Budget Act of 1974 (the Budget Act) requires that the CBO provide an estimate for any bill reported from committee. These cost estimates provide information on how the legislation would affect spending, revenues, and the deficit over the next 10 years relative to the baseline. Such cost estimates assist Congress in adhering to the budget resolution and other points of order, described below. General Budgetary Projections for the Upcoming Decades Each year, CBO provides Congress with its Long-Term Budget Outlook , which shows the effects of demographic trends, economic developments, and rising health care costs on federal spending, revenues, and deficits over the next 30 years. The report also shows the long-term budgetary and economic effects of some alternative policies. In addition, in its cost estimates, CBO is required to note whether the underlying legislation would increase deficits in future decades. To assist the Senate in complying with its "long-term deficit rule" (described below), CBO notes whether the legislation would increase on-budget deficits in any of the four consecutive 10-year periods beginning with 2030. OMB provides long-term projections in the President's annual budget request in a section titled, "Long Term Budget Outlook." These projections recently spanned a 25-year period and include projections under different fiscal scenarios. The Government Accountability Office also provides information and interactive tools on projected spending, revenue, deficits, and debt over the next 70 years. Spending Projections for Individual Programs Long-term information and projections are available for some individual programs. For example, the Social Security and Medicare Trustees issue respective actuarial estimates of each trust fund for the next 75 years. These reports contain both short- and long-range projections of annual program expenditures and payroll tax receipts. There are also estimates of the actuarial deficits over the next 75 years that represent the shortfall between the program's projected expenditures and income. In addition, the CBO provides long-term projections on specific programs. For example, CBO publishes recurring reports on the long-term projections for Social Security, the long-term implications of the Future Years Defense Program, and 10-year costs of U.S. nuclear forces. Current Congressional Tools for Long-Term Budgeting The Constitution grants Congress the power of the purse. In carrying out such duties, Congress has developed budget-related rules and legislation as well as committees to carry out this responsibility. Some of these tools might be used in long-term budgeting. Congressional Committees Congressional committees serve Congress by specializing in particular policy areas. They do this by gathering information, making policy recommendations, and performing oversight. In the course of this work, committees study and make recommendations related to the long-term implications of the specific programs within their jurisdiction. For example, the Senate Finance Committee and the House Ways and Means Committee may hold hearings on the long-term outlook for Social Security. In addition, the House and Senate each have a Budget Committee, established by the Budget Act. They enjoy jurisdiction over the budget resolution, the budget reconciliation process (described below), and the budget process generally. As stated by the Senate Budget Committee, "The [Budget] Committee, the budget resolution and reconciliation process, and enforcement authorities were created to enable Congress to create, enforce, and manage the annual Federal budget, including all types of Federal spending and revenues." The Budget Committees may impact the budget and the budget process in many ways. They are responsible for developing and drafting a budget plan in the form of a budget resolution. A budget resolution agreed to by the House and Senate may trigger the budget reconciliation process, which has been used to make legislative changes reducing future deficits (described below). During the development of the budget plan, the Budget Committees gather information on the budget from many sources. They review the President's budget submission, and the director of OMB typically testifies before each Budget Committee. Additionally, the committees closely review CBO's annual budget and economic outlook for the upcoming 10 years, and the director of CBO testifies before the Budget Committees to answer questions. The Budget Committees also hold hearings and consider legislation related to the budget process and the budget as a whole. This has included examining the long-term budget outlook and the potential for a more long-term budget process. Since the Budget Committees enjoy jurisdiction over the budget process generally, they would likely be involved in any efforts to alter the current process. The Budget Resolution and the Budget Reconciliation Process The budget resolution reflects an annual agreement between the House and Senate on spending and revenue levels for the upcoming fiscal year and at least four additional years. The budget resolution does not become law. Therefore, no money is spent or collected as a result of its adoption. Instead, it is an agreement between the House and Senate meant to assist Congress in considering an overall budget plan. Once agreed to by both chambers in the exact same form, the budget resolution creates parameters that may be enforced in two primary ways: (1) by points of order and (2) by using the budget reconciliation process. Enforcement through Points of Order Once the budget resolution has been agreed to by both chambers, certain levels contained in it are enforceable through points of order. This means that if legislation is being considered on the House or Senate floor that would violate certain levels contained in the budget resolution, a Member may raise a point of order against the consideration of that legislation. The Budget Act requires that the budget resolution include the following budgetary levels for the upcoming fiscal year and at least four additional years (often referred to as out years): total spending, total revenues, the surplus/deficit, new spending for each major functional category, the public debt, and (in the Senate only) Social Security spending and revenue levels. The Budget Act also requires that the aggregate amounts of spending recommended in the budget resolution be allocated among committees. Enforcement through the Budget Reconciliation Process While points of order can be effective in enforcing the budgetary goals outlined in the budget resolution, they can be raised against legislation only when it is pending on the House or Senate floor. Moreover, points of order cannot limit direct spending or revenue levels resulting from current law. Often, for the budgetary levels in the budget resolution to be achieved, Congress must pass legislation to alter the levels of revenue and/or direct spending resulting from existing law. In this situation, Congress seeks to reconcile the levels of direct spending and revenue under existing law with those budgetary levels expressed in the budget resolution. To assist in this process, the budget reconciliation process allows special consideration of legislation that would accomplish those budgetary levels expressed in the budget resolution. If Congress intends to use the reconciliation process, reconciliation directives must be included in the annual budget resolution. These directives instruct individual committees in the House and Senate to develop and report legislation that would change laws within their jurisdiction related to direct spending, revenue, or the debt limit. Such reconciliation legislation is then eligible to be considered under special expedited procedures in both the House and Senate. These procedures are especially important in the Senate as they include a limit on debate time. This means the legislation does not require the support of three-fifths of Senators to bring debate to a close. Since 1980, Congress has sent the President 25 reconciliation acts, 21 of which were signed into law. Reconciliation has most often been used to enact legislation that was projected to reduce deficits. For example, between 1981 and 1984, four reconciliation bills were enacted that were each projected to decrease the deficit. Reconciliation legislation can be used to make policy changes that are temporary or permanent, therefore affecting the long-term budget. For a brief description of each reconciliation bill enacted into law, see CRS Report R40480, Budget Reconciliation Measures Enacted Into Law: 1980-2017 , by Megan S. Lynch. While the reconciliation process has been used to enact legislation that was projected to increase the net deficit, a Senate rule (known as the Byrd rule) prohibits reconciliation legislation from increasing the net deficit outside the "budget window." (The budget window is the period covered by the underlying budget resolution and recently has spanned 10 years. ) Additional Rules and Points of Order The House and Senate have many additional budget-related points of order that seek to restrict or prohibit consideration of different types of budgetary legislation, some of which have long-term implications. These points of order are found in various places such as the Budget Act, House and Senate standing rules, and past budget resolutions. For example, the House and Senate have pay-as-you-go (PAYGO) rules that prohibit the consideration of direct spending or revenue legislation that is projected to increase the deficit in either of two time periods: (1) the period consisting of the current fiscal year, the budget year, and the four ensuing fiscal years following the budget year and (2) the period consisting of the current fiscal year, the budget year, and the ensuing nine fiscal years following the budget year. Additionally, in the Senate, a rule exists that is often referred to as the "long-term deficit point of order." It prohibits the consideration of legislation that would cause a net increase in deficits of more than $5 billion in any of the four consecutive 10-year periods beginning after the upcoming 10 years. Previously, the House had a similar rule that prohibited consideration of legislation that would cause a net increase in mandatory spending in excess of $5 billion during the same period. The House rule is no longer in effect. Additional Budget Enforcement Mechanisms Currently in Effect In addition to points of order, there are other types of budget enforcement mechanisms that seek to restrict or prohibit the enactment of budgetary legislation over the long term. Legal Limits on Annual Discretionary Spending The Budget Control Act of 2011 (BCA; P.L. 112-25 ) established statutory limits on discretionary spending for a 10-year period ( FY2012-FY2021 ) . (S imilar discretionary spending limits were in effect between FY1991 and FY2002.) The BCA sets separate annual limits for defense discretionary and nondefense discretionary spending. The defense category consists of discretionary spending in budget function 050 (national defense) only. The nondefense category includes discretionary spending in all other budget functions. If discretionary appropriations are enacted that exceed a statutory limit for a fiscal year, across-the-board reductions (i.e., sequestration) of nonexempt budgetary resources are triggered to eliminate the excess spending within the applicable category. Statutory PAYGO In February 2010, the Statutory Pay-As-You-Go Act of 2010 ( P.L. 111-139 ) was enacted establishing a budget enforcement mechanism commonly referred to as "Statutory PAYGO." Statutory PAYGO is generally intended to discourage enactment of legislation that is projected to increase the on-budget deficit over five and 10 years. To enforce Statutory PAYGO, OMB is required to record the budgetary effects of newly enacted revenue and direct spending legislation over the course of a year. After the end of a congressional session, OMB is required to issue an annual PAYGO report noting whether a debit has been recorded for the current budget year. If no such debit is found, no action occurs. If a debit is found, however, the President must issue a sequestration order, which automatically implements across-the-board cuts to non-exempt direct spending programs to compensate for the amount of the debit. Selected Budget Enforcement Related Mechanisms No Longer inÂ Effect While the following budget related mechanisms are no longer in effect, they provide insight into Congress's past budget process reform efforts and the desire for long-term budgeting. Statutory Deficit Limits In 1985, the Balanced Budget and Emergency Deficit Control Act ( P.L. 99-177 )âreferred to as the Gramm-Rudman-Hollings Actâemployed budget process mechanisms in an attempt to force Congress and the President to balance the budget within a six-year period by specifying annual deficit limits for each fiscal year (1986-1991). The act required that both the President and Congress adhere to the deficit limits when developing their budget plans. The act did not specify what policy changes should be made to achieve deficit reduction, leaving Congress and the President to negotiate over possible revenue increases and spending decreases. To enforce the specified deficit limits, the act set forth a specific process for the cancellation of spending by sequestration in the event that the deficit limits were breached. These deficit targets and related enforcement mechanism were amended by the Balanced Budget and Emergency Deficit Control Act of 1987 ( P.L. 100-119 ) and then were fundamentally revised by the Budget Enforcement Act of 1990 ( P.L. 101-508 ), which replaced the focus on deficit targets under Gramm-Rudman-Hollings with a two-pronged approach to budgetary enforcement: the implementation of PAYGO procedures to control new direct spending and revenue legislation and discretionary spending limits to control the level of discretionary spending. For more information, see CRS Report R41901, Statutory Budget Controls in Effect Between 1985 and 2002 , by Megan S. Lynch. The Joint Select Committee on Deficit Reduction (111th Congress) The BCA created a Joint Select Committee on Deficit Reduction. The committee comprised 12 Members from the House and Senateâthree chosen by each of the chambers' party leaders. The committee was instructed to develop legislation to reduce the budget deficit by at least $1.5 trillion over the 10-year period FY2012-FY2021. Legislation reported by the committee would then be eligible to be considered under special expedited procedures in both the House and Senate. These procedures are especially important in the Senate since they include a limit on debate time. This means the legislation does not require the support of three-fifths of Senators to bring debate to a close. The BCA stipulated that if a measure meeting specific requirements was not enacted by January 15, 2012, then an automatic process would be triggered to enforce the budgetary goal established for the committee. The committee did not reach agreement on such legislation, and while the committee is no longer in effect, the automatic process triggered by the lack of enactment still remains. This comprises annual downward adjustments of the discretionary spending limits (described above) and sequester of nonexempt mandatory spending programs through FY2027. The Joint Select Committee on Budget and Appropriations Process Reform (115th Congress) The Bipartisan Budget Act of 2018 ( P.L. 115-123 ) created the Joint Select Committee on Budget and Appropriations Process Reform. The committee comprised 16 Members from the House and Senateâfour chosen by each of the chambers' party leaders. The committee was tasked with formulating recommendations and legislative language to "significantly reform the budget and appropriations process." The committee held a markup on draft legislation that concluded on November 29, 2018. The principal recommendation in the draft provided that the budget resolution would be adopted for a two-year cycle rather than the current annual cycle. The committee ultimately did not vote to report the bill as amended, and it was never considered by the full house.