IRS to Scale Back Oversight of Madoff-Like Trustees

The Internal Revenue Service has improved its oversight of nonbank trustees that act as custodians for tax-exempt retirement and savings accounts, and should now reevaluate the resources it expends on the program, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, came as a result of a congressional inquiry in the wake of the Bernard Madoff scandal. Prior to Madoff's guilty plea to fraud charges in Mrch 2009, the IRS had approved his limited liability company as a nonbank trustee for individual retirement arrangements. The main objective of TIGTA’s audit was to determine whether the IRS was ensuring that nonbank trustees actually meet the tax regulation requirements and whether there are any opportunities for cost savings within this program.

Taxpayers can make tax-deductible contributions to these retirement and savings accounts, as long as the custodian of the accounts is a bank, insurance company, or an approved nonbank trustee.

In the aftermath of the Madoff scandal, the IRS’s Employee Plans function expanded its nonbank trustee program by strengthening processes for approving nonbank trustee applications and conducting investigations to ensure nonbank trustees meet applicable tax regulations. TIGTA concluded that the actions taken by the Employee Plans function as a result of the Madoff scandal improved the IRS's oversight of nonbank trustees.

“It is appropriate that the IRS expanded its nonbank trustee program in the wake of the Madoff scandal,” said TIGTA Inspector General J. Russell George in a statement. “However, because investigations have not uncovered widespread noncompliance and would not likely uncover a Madoff-like scheme, the IRS must now determine how it can best balance limited resources with other programs.”

TIGTA also determined that nonbank trustee investigations focus on compliance with tax regulations and do not independently determine whether the securities exist.  As a result, it is unlikely that nonbank trustee investigations would uncover a scheme such as the one perpetrated by Madoff. In addition, most investigations determined that nonbank trustees either were in full compliance with tax regulations or had minor violations that were correctable.

In response to the report, the IRS agreed with TIGTA’s recommendations. The IRS plans to evaluate the number of nonbank trustee investigations to determine the proper balance between such investigations and regular retirement plan examinations. In addition, the IRS plans to continuously monitor the changes to the list of approved nonbank trustees throughout the year and annually publish an announcement that contains the current list of approved nonbank trustees.