The IRS Role in the Madoff Ponzi

Since his arrest on December 11, 2008, we’ve been treated to a daily diet of “Bernard Madoff”. Congress is asking the SEC what happened. The SEC is asking itself the same question. Attorneys and forensic accountants for the victims are smelling blood in the water (lots of fee money) and the CPA auditor for Mr. Madoff’s companies is keeping his head down. This is nothing new. All ponzi schemes collapse when the supply of new victims dries up. And, in this case, the supply of new victims is a casualty of the collapse of the U. S. housing market and the use of real estate as ATM machines.

What has not been discussed is the role of the IRS in Mr. Madoff’s scheme. What am I talking about here? I am talking about the IRS computer program that matches items (like interest income, dividends and capital gains transactions) on tax returns filed by U.S. taxpayers with information forms (1099’s & K-1’s) that companies are required file with the IRS. If a taxpayer in Mr. Madoff’s pyramid reported a significant amount of dividend income received from Mr. Madoff, the IRS should have had an electronic record of it to compare with. Fifty billion dollars of investment paying 10% per year is $5 billion. Did the IRS ever ask anybody reporting Madoff scheme income about the source of the income? Had it done so, the scheme might have been uncovered years ago.