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Treasury Inspector General for Tax Administration

Press Release

June 18, 2012
TIGTA - 2012-23
Contact: David Barnes
(202) 622-3062

TIGTA: IRS Oversight of Nonbank Trustees Improves, Now Resources Should Be Reevaluated

WASHINGTON -- Oversight by the Internal Revenue Service (IRS) of nonbank trustees, the financial entities that act as the custodians for tax-exempt retirement and savings accounts, has improved, according to a new report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).

However, with fewer than 100 nonbank trustees and evidence that most are complying with the regulations, the IRS should reevaluate the resources it expends on this program to best balance its limited resources, the report concluded. TIGTA conducted its audit based on a congressional inquiry in the aftermath of the Bernard L. Madoff scandal. In March 2009, Mr. Madoff pled guilty to several felony charges including investor advisor fraud, wire fraud, money laundering, and theft from an employee benefit plan. Prior to Madoff's guilty plea, the IRS had approved his limited liability corporation as a nonbank trustee for individual retirement arrangements. The overall objective was to determine whether the IRS is ensuring nonbank trustees meet 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 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 because 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 J. Russell George, Treasury Inspector General for Tax Administration. "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 its 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.

Read the report.


Note: The difference between the date TIGTA issues an audit report to the Internal Revenue Service and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with Federal confidentiality laws.

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