Tax consequences of owning MLP's in an IRA account.
I am amazed by the dead ends one encounters when trying to arrive at the truth to this matter. Finally, after talking with several MLP tax assistance numbers, the IRS, and a tax expert, I have come to terms with my tax obligation.
First, I am speaking ONLY to my situation. I own 4 MLP's in my IRA account. As long as they are held in my IRA, taxes will be paid on all gains in value and distributions when I make cash withdrawals from my IRA. If you hold MLP's in a regular brokerage account, my comments are not meant for you. That said, the IRS tells me if the tax ID in part II box E is not yours (social security number) it should be an identifier for your broker. They will track your UBTI tax obligations (the number found in part III box 20 noted "V") and when you close out your positions in each MLP, they will be required to pay such tax for you out of your IRA account or contact you as to your UBTI obligation. Since most passive income is negative, it would be unusual to have any tax obligations since it would have to be above $1,000 annually. (Note: you can refer to your annual K-1 to keep track of your future UBTI tax that might come due when you close out your partnership share ownership. If the sum of your dollar amounts Part III box 20 noted "V" are under $1,000 in a given year you will not have any future UBTI obligation for that year). The representative I spoke to at TD Ameritrade stated he had never had to file a tax payment on UBTI to the IRS. Of course everyone you talk to will tell you to speak to a tax professional. He did as well.
I spoke to a CPA and was told no taxes should be filed from information on your annual K-1's received from MLP's held in an IRA account. Therefore regarding you K-1's that you get each year, keep them on file. The numbers are for your information only. (Note dividends (Part III box 6) and interest (Part III box 5) are not being paid to you thus you have no tax obligation even though you might be told by the MLP to file this on your annual 1040 schedule E.)
Rest easy. MLP's are good investment in an IRA. I encourage you to run my comments by a tax professional for your final peace of mind.
But I think that if you incur an aggregate of UBTI over $1000 in any tax year (as rare as it may be), the tax is owed on that year's tax. Your IRA custodian will file the proper form (but you need to send them your K-1s first) and write the IRS a check. The check WILL be drawn from your IRA. You will then have to pay a tax the following year on the IRA withdrawal.