IRS Role In Madoff Scandal Bears Examination

The Internal Revenue Service(IRS) has collected “untold billions” of tax dollars from investors swindled by fraudster Bernie Madoff’s Ponzi based on “earnings” that never existed.

That's the view of Lawrence Velvel, dean of the Massachusetts School of Law at Andover, who says IRS “had no constitutional right to tax (Madoff investors) because the Sixteenth Amendment allows it only to tax ‘income,’ not ‘phantom income.’” Madoff, since convicted, told his investors their “profits” were the result of his trades in their behalf when, in fact, he never made the trades but paid them from monies swindled from new investors.

Velvel, who was himself a victim of Madoff’s Ponzi scheme, points out “The IRS will give you a refund of only a few years of those taxes---money which we now know you were cheated out of from the beginning.” (Madoff is thought to have begun his scheme anywhere from 20 to 40 years ago.) And Velvel adds, “Nor will you get back more than a small fraction of your losses by virtue of the IRS’ new theft deduction rule…(which) will extensively benefit only the obscenely wealthy, who will receive scores of millions of tax deductions…”

The full role of IRS involvement in the Madoff scandal needs to be probed if only because IRS approved Madoff in June, 2004, as a nonbank custodian (of investors’ money) “even though he was in gross violation of its own regulations,” Velvel noted in an essay titled “The Vast Amount We Don’t Know About The Madoff Matter,” published July 8th on his blog VelvelOnNationalAffairs.com.

What’s more, Velvel writes, if IRS had inspected Madoff prior to approving him, it would have learned he stood in violation of IRS’s own regulations. This raises such questions as, “Was there criminal conduct on the part of the members of the IRS---the acceptance of bribes, for example?” Or, was there “’only’ simple gross negligence, incompetence and gross dereliction of duty by failing to inspect Madoff to be sure he complied with the regulations?”

Velvel scored the absence of vital information about the Madoff scandal is apparent at many levels. He deplored the lack of investigative reporting by the media, the refusal of IRS to divulge how it approved Madoff’s custodial role on grounds Madoff is a taxpayer and his records are confidential, and added that Judge Danny Chin “did us no favors by letting Madoff plead instead of forcing a trial at which much would inevitably be revealed.”

Velvel, a former Justice Department lawyer, writes “I do not remember a major crime in which, at the times of plea and sentencing of the lead culprit, the details of what happened, of what was done, were as little known publicly as in Madoff.” Accordingly, he asks:

Q: When and why the Ponzi scheme started?

Q: Which members of Madoff’s family, if any, were involved?

Q: What was known to investor Jeffry Picower, whose charitable foundation closed after the scandal broke, and who was returning 500% or more to his investors from Madoff?

Q: As Picower took out $5 billion more from Madoff than he put in, where did that money go?

Q: What did Madoff do to get the Securities & Exchange Commission to publicly state in 1992 there was nothing to indicate fraud in Madoff’s operations?

Q: Why wasn’t the government concerned when seven major Wall Street houses refused to do business with Madoff? (The houses were Morgan Stanley, Goldman Sachs, J.P. Morgan, CitiGroup, Merrill Lynch, Bear Stearns, and Credit Suisse.)

Q: If Madoff’s Ponzi scheme started because of some investment failure, what was the failure and when did it happen?

Velvel observes the Government has made it clear Madoff over the years moved $170 billion, supposedly all of which----apart from what Madoff kept for himself---was redeemed “but who is going to believe it until it is proven to be the case?”

“If you ask me, it is more likely that there was someone else involved in the deal who got a lot of the money---some think the American mafia, some think the Russian mafia, some think the Mossad and/or the CIA, some think others,” Velvel writes. “Some think a lot of the money is still in banks overseas and one wonders about all the excess billions withdrawn by Picower---where, or to whom, did that money go. The only fact currently known is that we don’t know what happened to all the money. And we are not going to know until a lot more information becomes public.”

Velvel is cofounder of the Massachusetts School of Law at Andover, a law school purposefully dedicated to providing a quality, affordable education to minorities, immigrants, and students from low-income households who otherwise would be unable to obtain a legal education. Velvel has been honored for his contributions to legal education by national magazines and holds a number of awards from publishing houses for his collections of essays on contemporary issues.

(Sherwood Ross is a media consultant to the Massachusetts School of law at sherwoodr1@yahoo.com.)

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