This posting raises the question whether the IRS may be as culpable as the SEC and FINRA for the continued success of Madoff's Ponzi scheme. If the possibility raised here turns out to be true, as I suspect will be the case, this would be a disaster for the country. For it would mean that what is perhaps the one agency which above all others must be kept competent and clean as a whistle, the agency that collects taxes, was instead a witting or unwitting facilitator of the worst kind of fraud. The consequences of this might accurately be called incalculable.
It is unknown to most people that, as part of its extensive authority over pension plans of all types, the IRS has the authority to approve so called non-bank custodians for IRAs and various other kinds of accounts (e.g., medical health plans). This goes back to the Employment Retirement Income Security Act of 1974. Congress, greatly concerned over many aspects of pension plans -- it wanted them, for example, to vest and be portable -- passed the 1974 act because
One of the most important matters of public policy facing the nation today is how to assure that individuals who have spent their careers in useful and socially productive work will have adequate incomes to meet their needs when they retire. This legislation is concerned with improving the fairness and effectiveness of qualified retirement plans in their vital role of providing retirement income. In broad outline, the objective is to increase the number of individuals participating in employer-financed plans; to make sure to the greatest extent possible that those who do participate in such plans actually receive benefits and do not lose their benefits as a result of unduly restrictive forfeiture provisions or failure of the pension plan to accumulate and retain sufficient funds to meet its obligations; and to make the tax laws relating to qualified retirement plans fairer by providing greater equality of treatment under such plans for the different taxpayer groups concerned.
Congress had found that problems with pension plans had included, among others, "Inadequate coverage, "Discrimination against the self-employed and employees not covered by retirement plans, "Inadequate vesting, "Inadequate funding, "Misuse of pension funds and disclosure of pension operations. Congress determined that "It is time for new legislation to conform the pension provisions [of prior legislation] to the present situation and to provide remedial action for the various problems that have arisen . . . . (Emphasis added.) Congress provided "additional rules regarding fiduciary requirements, and relied heavily on the IRS to enforce fiduciary standards:
Your committee believes that primary reliance on the tax laws represents the best means for enforcing the new improved standards imposed by the bill. Historically, the substantive requirements regarding nondiscrimination, which are designed to insure that pension plans will benefit the rank and file of employees, have been enforced through the tax laws and administered by the Internal Revenue Service. As a result, the Internal Revenue Service is already required to examine the coverage of the retirement plans and their contributions and benefits as well as funding and vesting practices in order to determine that the plans operate so as to conform to these nondiscrimination requirements. Also, the Internal Revenue Service has administered the fiduciary standards embodied in the prohibited transactions provisions since 1954.
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