4.72.18  Nonbank Trustee Investigation Procedures

4.72.18.1  (04-22-2011)
Overview of Nonbank Trustees

  1. A nonbank trustee or nonbank custodian (referred to hereinafter as "NBT") is an entity that is not a bank (as defined in IRC 408(n) ) or in some cases an insurance company (within the meaning of IRC 816) that is permitted to serve as a trustee or custodian for the arrangements listed below, if it demonstrates to the satisfaction of the Commissioner that the requirements specified under sections 1.408-2(e)(2) through (e)(5)(viii)(F) of the Income Tax Regulations (Regs.) are met:

    IRC 220 Archer medical savings accounts (Archer MSAs)
    IRC 223 Health savings accounts
    IRC 401 Qualified retirement plans or trust
    IRC 403(b)(7) Custodial Accounts
    IRC 408 Individual Retirement Arrangements (IRAs)
    IRC 408A Roth IRAs
    IRC 457(b) Deferred Compensation Plans of State & Local Government and Tax Exempt Organizations Custodial Accounts
    IRC 530 Education IRAs

  2. Approval to serve as an NBT falls under the jurisdiction of the Director, EP Division at Headquarters.

  3. Approved NBTs are investigated by EP Examinations for continued compliance with the NBT regulations.

  4. EP Examinations submits their NBT investigation reports to EP Rulings and Agreements at Headquarters.

  5. These procedures are primarily for Internal Revenue Agents, Tax Law Specialists, and their reviewers (hereinafter referred to as Agents).

4.72.18.1.1  (04-22-2011)
Legislation

  1. Effective 12/20/95, the provisions under Reg. 1.401-12(n) were revised and then moved to Reg. 1.408-2(e). See TD 8635, 1996-3 CB 52.

  2. Archer MSAs were enacted into law by the Small Business Job Protection Act (SBJPA), PL 104-191, effective for tax years beginning after 12/31/96. See IRC 220(d)(1)(B) , augmented by Q&A-10 of Notice 96-53, 1996-51 IRB 5.

  3. Health Savings Accounts were enacted into law by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, P.L. 108-173, effective for tax years beginning after December 31, 2003. See IRC 223(d)(1)(B).

  4. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) modified IRC 401(d)(1) so that for years beginning after 12/31/1983, the requirement that a trustee of a qualified retirement plan benefiting owner-employees be a bank or an approved NBT no longer applies. However, IRC 401(f) provides that the person holding the assets of a custodial account under IRC 401 must be a bank or an approved NBT.

  5. Roth IRAs and Education IRAs were enacted into law by the Taxpayer Relief Act of 1997 (TRA ’97) P.L. 105–34 effective for tax years beginning after 1997.

  6. IRC 457 was amended by the SBJPA and more recently by the Taxpayer Relief Act of 1997 (TRA ’97) for eligible deferred compensation plans, as defined in IRC 457(b) (457(b) plans). Notice 98-8, IRB 1998-4 IRB 6, which provides guidance relating to IRC 457(b) plans, provides that the custodian of such plan must meet the nonbank trustee requirements under Reg. 1.408-2(e).

  7. Reg. 1.408-2(e) was revised June 18, 2007, by TD 9331 (72 FR 33387) to add final regulations and remove temporary regulations that provide special rules for a governmental unit that seeks to qualify as a nonbank trustee of a deemed IRA that is part of its qualified employer plan.

4.72.18.1.2  (04-22-2011)
Definitions

  1. The term "account" or "fiduciary account" means:

    1. a medical savings account established under IRC 220;

    2. a health savings account described in IRC 223 ;

    3. a trust described in IRC 401(a) (including a custodial account described in IRC 401(f)) ;

    4. a custodial account described in IRC 403(b)(7) ;

    5. an individual retirement account (IRA) described in IRC 408 (including an account established by employers and certain associations of employees described in IRC 408(c) ;

    6. a custodial account described in IRC 408(h) ;

    7. a simplified employee pension plan described in IRC 408(k) ;

    8. a simple retirement account described in IRC 408(p) ;

    9. a deemed IRA under a qualified employer plan described in IRC 408(q) ;

    10. a Roth IRA described in IRC 408A ;

    11. a Coverdell education savings account described in IRC 530 (including a custodial account described IRC 530(g) ; and

    12. a custodial account of an eligible deferred compensation plan described in IRC 457(b) .

    Note:

    Reg. 1.408-2(e)(5)(viii)(A) provides that the term "account" or "fiduciary account" means a trust described in IRC 401(a) (including a custodial account described in IRC 401(f)), a custodial account described in IRC 403(b)(7), or an individual retirement account described in IRC 408(a) (including a custodial account described in IRC 408(h)). However, Reg. 1.408-2(e)(5)(viii)(A) was written before medical savings accounts described in IRC 220(d)(1)(B) and Notice 96-53 1996-2 CB 219, health savings accounts described in IRC 223, deemed IRAs described in IRC 408(q), Roth IRAs described in IRC 408A, Coverdell education savings accounts described in IRC 530, and custodial accounts of eligible deferred compensation plans described in IRC 457(b) either came into existence or required its trustee or custodian to be a bank (as defined in IRC 408(n)), a bank or an insurance company within the meaning of IRC 816 in the case of Archer MSAs and health savings accounts, or an approved nonbank trustee or custodian. Therefore, the definition of "account" or "fiduciary account" found at Reg. 1.408-2(e)(5)(viii)(A) is expanded here to include these accounts. Failure to do so will result in the miscalculation of the NBTs required net worth.

  2. The term "plan administrator" means an administrator as defined in Reg. 1.414(g)-1.

  3. The term "common investment fund" means a trust that satisfies the following requirements:

    1. The trust consists of all or part of the assets of several accounts that have been established with the applicant, and

    2. The trust is described in IRC 401(a) and is exempt from tax under IRC 501(a), or is a trust that is created for the purpose of providing a satisfactory diversification of investments or a reduction of administrative expenses for the participating accounts and that satisfy the requirements of IRC 408(c).

  4. The term "fiduciary records" means all matters which are written, transcribed, recorded, received, or otherwise come into the possession of the applicant and are necessary to preserve information concerning the acts and events relevant to the fiduciary activities of the applicant.

  5. The term "qualified public accountant" means a qualified public accountant, as defined in section 103(a)(3)(D) of the Employee Retirement Income Security Act of 1974, 29 USC 1023(a)(3)(D), who is independent of the applicant.

  6. The term "net worth" means the amount of the applicant's assets less the amount of its liabilities, as determined in accordance with generally accepted accounting principles.

4.72.18.2  (04-22-2011)
Technical Overview

  1. The trustee or custodian for an Archer MSA established under IRC 220, a health savings account established under IRC 223, an IRA established under IRC 408, 408A or 530, and the custodian of a plan qualified or established under IRC 401, IRC 403(b)(7), or IRC 457(b), must be —

    1. A bank, or

    2. In the case of an Archer MSA or a health savings account, a bank or an insurance company (within the meaning of IRC 816), or

    3. Another person (not an individual) approved by the Service to serve as an NBT. See Reg. 1.408-2(e)

  2. To serve as an NBT, an entity must demonstrate in writing, to the satisfaction of the Commissioner, that the requirements of Regs. 1.408-2(e)(2) through (e)(5)(viii)(F) will be met. See Reg. 1.408-2(e)(1).

  3. If the requirements are met, the NBT will receive a written Notice of Approval that will specify the day on which the approval is effective. The NBT is not authorized to accept any fiduciary account before the Notice of Approval becomes effective. See Reg. 1.408-2(e)(7)(i).

  4. The continued approval of a NBT applicant is contingent upon the continued satisfaction of the criteria under Reg. 1.408-2(e).

  5. The NBT must notify the Commissioner, in writing ("Notice of Change"), of any change that affects the continuing accuracy of any representations made in its application. See Reg. 1.408-2(e)(6)(iv).

  6. If the Commissioner determines that the NBT is unwilling or unable to administer fiduciary accounts in a manner consistent with these requirements, the Notice of Approval will be revoked. See Reg. 1.408-2(e)(7)(iv).

  7. NBT applications are submitted under Revenue Procedure 2011–4, 2011-1 I.R.B. 123 (as modified) to the following address:

    Internal Revenue Service
    Commissioner, TE/GE
    Attention: SE:T:EP:RA
    P.O. Box 27063
    McPherson Station
    Washington, DC 20038

4.72.18.2.1  (04-22-2011)
Selection for Investigation

  1. A list of all approved NBTs is developed for each area by the Director, EP Division and transmitted to EP Examinations Program and Review at the beginning of each fiscal year.

  2. Each fiscal year, EP Classification will select a minimum of four approved NBTs (from the list of approved NBTs developed by the Director, EP Division) for each Area to investigate for continued compliance with the NBT regulations (additional approved NBTs may be selected for investigation based on operating priorities and resource availability). At least 20 NBT investigations will be conducted each fiscal year and each NBT will be investigated at least once every five years.

  3. If the Service receives information that a specific approved NBT may not be in compliance with the NBT regulations, a request or recommendation to EP Classification will be submitted for investigation of the approved NBT.

4.72.18.3  (04-22-2011)
Establishing the NBT Investigation Case

  1. EP Classification will establish the NBT investigation of the selected approved NBT on RCCMS and Non-Master File (NMF) AIMS as:

    • RCCMS Type: Non-Bank Trustee Investigation

    • Activity Code: 182

    • Project Code: 6182

    • Case Grade: 12

    • MFT: 99

    • Source Code 26

    • A 0415XXXX Statute Date in Keeping with the Period Assigned

  2. EP Classification will include in the case file the following research documents:

    1. INOLES/T - To verify entity information.

    2. BMFOLI - To verify return filings, balances due, freeze codes.

    3. PMFOLS - To identify information return filings issued by the entity, i.e., Form 1099-R, Form 5498). If specific data is needed for these forms, IRPTR(R) can be requested where the data could be extracted from RICS.

    4. AMDIS - To verify the entity is not under current audit.

  3. EP Classification will obtain the NBT electronic folder that contains all available closed NBT case files of the approved NBT under investigation from EP Rulings and Agreements.

  4. EP Classification will forward the NBT electronic folder, the name and contact information of the Employee Plans Rulings & Agreements (EP Rulings and Agreements) Technical contact assigned to the NBT investigation, and any other pertinent information to the manager of the EP Examination group that will perform the NBT investigation.

    Note:

    The EP Rulings and Agreements Technical employee is assigned by the manager EP Rulings and Agreements Technical Group 1.

  5. The Group Manager will assign the NBT investigation to an Agent.

  6. The Agent will :

    1. Consult with the designated contact person in EP Rulings and Agreements Technical (SE:T:EP:RA:T1) monthly to report on the status of the investigation and to discuss any concerns.

    2. Contact the EP Rulings and Agreements contact at any time to address questions about the NBT regulations, the NBT investigation procedures discussed in this IRM section, or to discuss any other problems they may encounter.

4.72.18.3.1  (04-22-2011)
Full Investigation Determination

  1. Determine if an investigation is necessary based on the following:

    IF AND THEN
    1. An entity acts as an NBT but was never approved as an NBT:   Do not start the investigation:
    Consult with the EP Rulings and Agreements contact person to develop the recommendation and rational to be used in the Transmittal Sheet discussed at IRM 4.72.18.4(4).
    Close the case following the procedures in IRM 4.72.18.4.
    2. An approved NBT indicates that it is no longer serving as an NBT: Wants to withdraw its NBT application, and remove its name from the list of approved NBTs, Obtain from the approved NBT a written statement (to be enclosed in the NBT investigation case file) stating that:
    1. The accounts were transferred to another entity or distributed to the account owner. In the case of a transfer, the statement should include the transferee’s name, address, telephone, and person to contact.

    2. The NBT wants to withdraw its application and have its name removed from the list of approved NBTs.


    Inform the NBT that to obtain another NBT Notice of Approval in the future, it must submit an application and user fee.
    Close the case following the procedures in IRM 4.72.18.4.
    3. The approved NBT is out of business, and: A contact person who has the authority to speak for the defunct NBT is available, (e.g., when an NBT ceases to exist because it merged into another entity, the surviving entity has the authority to speak for the defunct NBT), Obtain a written statement (to be enclosed in the NBT investigation case file) from that person that:
    1. Discloses whether the fiduciary accounts were transferred to another entity or distributed to the account owner. In the case of a transfer, the statement should include the transferee’s name, address, telephone, and person to contact.

    2. Requests the withdrawal of the defunct NBT’s NBT application and the removal of the defunct NBT’s name from the list of approved NBTs.

    Note:

    Do not switch the investigation to the surviving entity.
    Close the case following the procedures in IRM 4.72.18.4.

    4. The approved NBT is out of business and no contact person is available:   Notate that fact in the report and the Transmittal Sheet.
    Close the case following the procedures in IRM 4.72.18.4.
    5. The approved NBT is not currently serving as an NBT: Wants to retain its Notice of Approval for future use, Conduct the investigation because the NBT must continue to meet the requirements of the regulations. See IRM 4.72.18.3.2.
    6. None of the above applies:   Conduct the NBT investigation. See IRM 4.72.18.3.2.

4.72.18.3.2  (04-22-2011)
Prepare for the NBT Investigation

  1. To prepare for the NBT investigation, take the following actions.

      1. Review the NBT application file and IDRS research.
      2. Set up an (on-site) meeting with the NBT.
        Identify the individual (contact person) who has authority to discuss the NBT's compliance with the NBT regulations.
        Contact and inform the contact person that the company has been selected for an investigation to verify its continued compliance with the NBT requirements of Reg. 1.408-2(e) through 1.408–2(e)(5)(viii)(F)
        Set up an (on-site) meeting through the contact person. Allow enough time, before the meeting, to allow the contact person to receive an appointment letter (see Exhibit 4.72.18-1) and assemble any requested information or documents.
      3. Prepare and send to the NBT's contact person:
        An appointment letter. See Exhibit 4.72.18-1.
        An Information Document Request (IDR). See Exhibit 4.72.18-2.
        A Disclosure Statement. See Exhibit 4.72.18-3.
      4.   Prepare interview questions. See Exhibit 4.72.18-4. DO NOT SEND THE INTERVIEW QUESTIONS TO THE NBT.

  2. The NBT must provide the following information or documents to demonstrate continued compliance with the NBT regulations:

    Information or Documents to Request Explanation
    (1) A list of owners with their percentage of ownership. Use to determine if the NBT continues to meet the continuity requirement of Reg. 1.408-2(e)(2)(i). See IRM 4.72.18.3.3 (2)
    (2) The Corporate Charter and/or Articles of Incorporation, or a document establishing the formation of the NBT. This verifies the state and date of the NBTs incorporation or formation.
    This also verifies the state that has jurisdiction over the NBT.

    Note:

    Do not request this information if it is included in the application case file.


    (3) By-laws, operating procedures or some other document that controls the NBT’s activities containing the rules of fiduciary conduct found at Reg. 1.408-2(e)(5). See IRM 4.72.18.3.3 (3) This verifies that the NBT does in fact have the document required by Reg. 1.408-2(e)(5).
    (4) A copy of the organization chart.  
    (5 ) A copy of the NBT’s bond (or some other type of insurance) covering all employees taking part in the performance of the NBT’s fiduciary duties. See IRM 4.72.18.3.3 (7) and Reg. 1.408-2(e)(5)(i)(B). Request a copy of the NBT’s bond (or some other type of insurance) that is properly endorsed by the insurer and includes all provisions, conditions, limitations, addenda, riders, etc., to provide evidence that:
    1. A bond exists.

    2. The NBT is the named (or one of the named) insured.

    3. The bond is current and in force.

    4. The insurer’s liability limit is at least $250,000 after deductions (if the insurer’s liability limit is not at least $250,000, the NBT must cause the insurer to raise its liability limit to at least $250,000).

    (6) A copy of the valuation report of the assets in the fiduciary accounts as of the most recent valuation date. See IRM 4.72.18.3.3 (11) and Reg. 1.408-2(e)(5)(ii)(E). The value of the assets in the fiduciary accounts is used in the adequacy of net worth calculation. See IRM 4.72.18.3.3 (12) and Reg 1.408-2(e)(5)(ii).
    (7) A copy of the most recent Auditor’s Report of the audits and examinations of the NBT’s fiduciary books and records. See IRM 4.72.18.3.3 (13) and Reg. 1.408-2(e)(5)(iii)(C). Obtaining a copy of the report will:
    1. Provide evidence that the NBT is actually causing the audit that Reg. 1.408(e)(5)(iii)(A) or (B) requires, and
    2) Reveal whether the fiduciary accounts have been administered in accordance with the [tax] law, the NBT’s rules of fiduciary conduct (Reg. 1.408-2(e)(5)) and sound fiduciary principles.
    (8) Copies of Investment Committee and Board of Directors Minutes. Investment Committee and Board of Directors minutes may reveal whether the fiduciary accounts have been administered in accordance with [tax] law, the NBT’s rules of fiduciary conduct (Reg. 1.408-2(e)(5)) and sound fiduciary principles. The minutes may also reveal whether the NBT has knowingly, willfully, or repeatedly failed to administer fiduciary accounts in a manner consistent with the requirements of the Internal Revenue Code ("Code" or "IRC") and the Income Tax Regulations (("regulations") or ("Reg.")) thereunder or has administered a fiduciary account in a grossly negligent manner. (See Reg. 1.408-2(e)(7)(iv).
    Request this information only if the Agent has reviewed all other aspects of the NBT and still feels additional information is warranted before making a conclusion on the compliance of the NBT.
    (9) Random copies of reports required by Regs. 1.408-5, 1.408-6, and 1.408-7 dealing with annual reports by trustees, disclosure statements, and reports on distributions, respectively, issued to fiduciary account owners during the most recent tax year. See Reg. 1.408-2(e)(4)(ii)(C).  
    (10) A copy of the most recent taxable year’s financial statement with auditor’s comment. Use when calculating the NBT’s adequacy of net worth. See IRM 4.72.18.3.3 (12).
    (11) A copy of the most recent aging report of accounts payable. See Reg. 1.408-2(e)(2)(v). This report provides insight to the NBTs financial responsibility. Reg. 1.408-2(e)(2)(v), in pertinent part, asks the NBT to exhibit its ability to pay its debts [that are not under a legal dispute] as they become due. This can be ascertained from the NBT’s financial statements.

    Note:

    The regulations do not require the NBT to demonstrate that it actually pays its debts, however, the aging report may reveal whether the NBT actually pays its debts as they come due.


    The aging report may also reveal if the NBT is acting irresponsibly with regard to paying its debts. Paying its debts irresponsibly may indicate that there is some degree of irresponsibility in the NBT’s handling of its fiduciary duties with respect to the fiduciary accounts.
    (12) Personnel folders of the employees specified below. See IRM 4.72.18.3.2 (3). and Reg. 1.4018-2(e)(2)(iii) . This information may reveal the NBT's employees' expertise in the administration of fiduciary powers used in handling fiduciary accounts.

  3. Along with requesting the above information and documents, ask for separate meetings (one immediately after the other) at the time of the on-site meeting with:

    1. The head of the Trust Department and the supervisors/managers of the trust personnel to gain an understanding of the internal controls and the systems utilized for accounting for the assets of the fiduciary accounts. The meeting should not take longer than two hours.

    2. A few (not more than 7) randomly selected employees who handle the fiduciary accounts to verify that the controls are working and to gain an understanding of their experiences with handling fiduciary accounts.

4.72.18.3.3  (04-22-2011)
Verify Compliance with the NBT Requirements

  1. Interview the approved NBT to verify compliance with the NBT requirements below. Use the Checksheet/Workpaper to document the investigation. See IRM 4.72.18.3.5

    NBT Requirement Verify the following:
    Continuity: The NBT continues to meet the continuity requirement. See IRM 4.72.18.3.3 (2)
    Established Location: The NBT continues to maintain an established business location that is accessible during normal business hours and report the address of that business location. See Reg. 1.408-2(e)(2)(ii).
    Fiduciary Experience or Expertise: A significant part of the NBT’s business continues to consist of administering fiduciary accounts.
    Alternatively, determine if the NBT continues to employ personnel experienced in administering fiduciary accounts. See Reg. 1.408-2(e)(2)(iii).
    Formal training such as a college degree is not sufficient to satisfy the expertise requirement. The employee needs to have actual experience in the administration of the fiduciary powers utilized in the handling of retirement plans.
    Financial Responsibility: The NBT pays its debts within 30 days of falling due unless they are the subject of a legal dispute. See IRM 4.72.18.3.2 (2) and Reg.1.408-2(e)(2)(v)
    Capacity to Account: Verify the NBT’s competence with respect to accounting for the interests of a large number of individuals including calculating and allocating income earned and paying out distributions to payees. See Reg.1.408-2(e)(3).
    Fitness to Handle Funds The NBT’s competence with respect to performing activities normally associated with the handling of retirement funds. See Reg. 1.408-2(e)(4), (especially those activities described in (ii)(A)-D).
    Rules of Fiduciary Conduct: See paragraph (3) below.
    Furnish a Copy of its Notice of Approval to its Customers The NBT furnishes the plan administrator or the person for whose benefit the account is to be established with a copy of the NBT’s written Notice of Approval to serve as a nonbank trustee or custodian. Reg. 1.408-2(e)(7(iii).

  2. Continuity. The NBT must assure the uninterrupted performance of its fiduciary duties notwithstanding the death or change of its owners. Regs. 1.408-2(e)(i)(B) and (C) provide safe harbors (diversity of ownership) for meeting the continuity requirement. Headquarters has approved some NBTs during the application process or sanctioned some NBTs during the Notice of Change process (Reg. 1.408-2(e)(6)(iv)) who fell outside of the safe harbors based on a "facts and circumstances test." The factors used in the facts and circumstances test are:

    Factor Considerations
    Concentration of ownership: How close does the applicant come to satisfying the sufficient diversity safe harbors?
    Non-owner management: To what degree is the continuing existence, organization, viability, etc., of the applicant dependent upon the owner(s)? (Where management is separate from ownership and the owner(s) is (are) not involved in day-to-day management, the applicant should be less susceptible to organizational instability due to death or disability of the owner(s)).
    Overall financial condition:  
    Substantial business operation: How many: a) employees and b) physical business locations does the applicant have? (A large business establishment, perhaps with geographically diverse locations, may, like the companies availing themselves of the 12b/12g (Reg. 1.408-2(e)(2)(i)(B)(2) and (3)) exception, as a practical matter is less likely to go out of existence solely because of the death or incapacity of one person.
    Regulatory supervision: In the case of a broker-dealer, this would be evidenced by membership in the Financial Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC).
    A company whose stock is subject to disclosure under the Securities Act or that is a reporting company under the Exchange Act would demonstrate regulatory supervision because in either case the company would be subject to SIPC as well as the reporting requirements of section 13 of the Exchange Act.
    There may be state or local regulatory supervision to take into account.
    Number of years of operation:  
    Miscellaneous: This category would take into consideration factors unique to a particular applicant that does not fit into one of the six preceding categories. These factors could be ones that either support or refute an applicant’s satisfaction of the continuity requirement.

    Note:

    None of these factors are, in and of themselves, sufficient to justify approval or disapproval of an applicant. The weight of any particular factor depend on the "facts and circumstances."

    IF AND THEN
    The NBT under investigation falls outside of the safe harbors.   Determine (from the closed NBT application case file) whether the NBT met the safe harbors or the facts and circumstances test at the time the application was approved or at the time Headquarters acknowledged (without raising issue) a subsequent Notice of Change (Reg. 1.408-2(e)(6)(iv)) in the NBT’s ownership structure.
    The NBT failed to satisfy the safe harbors after the application was approved. Headquarters never considered the NBT’s change in facts and circumstances after the application was approved. Provide a statement in the Transmittal Sheet to the Director, EP Division that the NBT’s continuity facts and circumstances changed since its application. See Exhibit 4.72.18-7
    Headquarters acknowledged the NBT’s Notice of Change of the NBT’s ownership structure. In its acknowledgement, Headquarters indicated that the change may adversely affect the NBT’s continued approval. Provide a statement in the Transmittal Sheet that Headquarters raised an issue with the NBT’s continuity in an acknowledgement letter of a Notice of Change.

  3. Rules of Fiduciary Conduct. Reg. 1.408-2(e)(5) provides that the applicant [NBT] must demonstrate that under applicable regulatory requirements, corporate or other governing instruments, or its established operating procedures it provides the provisions [rules of fiduciary conduct] found at Regs. 1.408-2(e)(5)(i) through (viii)(F).

    1. Compliance with this requirement may be demonstrated by a resolution of the NBT’s board of directors (or its equivalent) adopting the rules of fiduciary conduct and a copy of the document or the appropriate section of the document that contains the rules of fiduciary conduct as adopted by the board of directors. The rules of fiduciary conduct may not be incorporated by reference.

    2. In lieu of the above demonstrations, the NBT may provide evidence it is operating under applicable statutory requirements either under state or federal law, which mirror the rules of fiduciary conduct.

    3. During the application process the NBT demonstrated that it had such document.

  4. Verify that the NBT’s owners or directors are responsible for:

    1. The determination of the NBT’s fiduciary policies.

    2. The investment and disposition of property held by the NBT in a fiduciary capacity.

    3. The direction and review of the actions of all employees (hire-fire relationship) utilized by the NBT in the exercise of its fiduciary powers are the responsibility of the NBT’s owners or directors or designated employees who are assigned, by action duly recorded, by the owners or directors (Responsibility of Owners Reg. 1.408-2(e)(5)(i)(A)(1)).

      Note:

      In carrying out this responsibility, the owners or directors may assign to designated employees, by action duly recorded, the administration of such of the NBT’s fiduciary powers as may be proper to assign.

  5. Verify that in operation, a written record is made of the acceptance, and relinquishment or closing out of all fiduciary accounts, and of the assets held for each account. Reg. 1.408-2(e)(5)(i)(A)(2).

  6. Verify that in operation, if the NBT (or a member of a controlled group of corporations (within the meaning of IRC 1563(a) ) to which the NBT belongs) has the authority or the responsibility to render any investment advice with regard to the assets held in or for each fiduciary account, it determines the advisability of retaining or disposing of the assets at least once during each period of 12 months. Reg. 1.408-2(e)(5)(i)(A)(3).

  7. Obtain a copy of the bond or insurance policy, in which the NBT is the named insured, that is properly endorsed by the insurer and includes all conditions, limitations, addendum, and riders and include it in the Investigation case file (Reg. 1.408-2(e)(5)(i)(B)) to verify that in operation:

    1. All employees taking part in the performance of the NBT’s fiduciary duties are bonded in a current, properly endorsed bond or insurance policy that is similar to a standard fidelity, stock broker, or financial institution bond where the NBT is named as the insured, and

    2. The liability limit of the insurer of the bond or insurance policy is no less than $250,000 after all deductibles.

  8. Verify that in operation the NBT employs or retains legal counsel who is readily available to pass upon fiduciary matters and to advise the NBT. Reg. 1.408-2(e)(5)(i)(C).

  9. If the NBT (or a member of a controlled group of corporations within the meaning of IRC 1563(a) to which the NBT belongs), has the authority or the responsibility to render investment advice with regard to the assets held in or for each fiduciary account, verify that in operation the NBT segregates the performance of its fiduciary duties from other business activities by maintaining a separate trust or custodial division under the immediate supervision of an individual designated for that purpose. The trust or custodial division may utilize the personnel and facilities of other divisions of the NBT and other divisions of the NBT may utilize the personnel and facilities of the trust or custodial division, as long as the separate identity of the trust or custodial division is preserved. Reg. 1.408-2(e)(5)(i)(D).

  10. Verify that the NBT’s net worth (as defined in Reg. 1.408-2(e)(5)(viii)(F)) is adequate.

    Note:

    A governmental unit that seeks to qualify as a nonbank trustee of a deemed IRA that is part of a plan qualified under IRC 401(a), IRC 403(a), IRC 403(b), or IRC 457 need not demonstrate that it satisfies the net worth requirements of Reg. 1.408-2(e)(5)(ii) or this section if it demonstrates instead that it possesses taxing authority under applicable law. Reg. 1.408-2(e)(8)(i).

    For purposes of this IRM section, the term governmental unit means a state, political subdivision of a state, and any agency or instrumentality of a state or political subdivision of a state. Reg. 1.408-2(e)(8)(ii)

  11. Verify that the NBT determines the value of the assets held by it in fiduciary accounts at least once in each calendar year and no more than eighteen months after the preceding valuation. The assets must be valued at their fair market value, except that the assets of an employee pension benefit plan to which section 103(b)(3)(A) of the Employee Retirement Income Security Act of 1974 (29 USC 1023(b)(3)(A)) applies will be considered to have the value stated in the most recent annual report of the plan. Reg. 1.408-2(e)(5)(ii)(E).

    1. The value of all assets held by the NBT in fiduciary accounts is an important element of the formulas used to determine the adequacy of the NBT’s net worth. Therefore, it is important to ensure that the value of the NBT’s fiduciary accounts is accurate.

    2. The NBT may not declare the value of certain assets (such as limited partnerships and stock of closed corporations that are not publicly traded) as indeterminable or consistently report a value of $0.00, $1.00, or cost. If it were allowed to do so, the adequacy of its net worth will become indeterminable. In addition, Forms 1099R and 5498 will be under or over stated resulting in the loss of tax revenue or over taxation of the account holder. Therefore, the NBT must value all assets in its fiduciary accounts. For those assets whose value is not easily determinable, the NBT must develop a method for valuing such assets and provide a description of the method.

    3. If the NBT is unwilling or unable to value all the assets it holds in fiduciary accounts, the case should be closed with the recommendation of revocation pursuant to the closing procedures at IRM 4.72.18.4 because the adequacy of the NBT’s net worth can not be determined.

  12. Calculate the adequacy of the NBT’s net worth using the following equations:

    Condition Adequate Net Worth Equation
    Before the NBT accepts new accounts during the current year, its net worth (determined as of the end of the most recent taxable year) must have exceeded: The greater of $100,000.00 or the sum of —
    1. Two percent of the value (determined as of the most recent valuation date) of all of the assets it holds in fiduciary accounts passively. The NBT is passive if it (or a member of a controlled group of corporations (within the meaning of IRC 1563(a) ) to which the NBT belongs) does not render investment advice, make investment decisions, or directly or indirectly control the investment activity of the fiduciary accounts. An NBT is not passive if any of the fiduciary accounts are maintained in a common investment fund (within the meaning of Reg. 1.408-2(e)(5)(viii)(C) in accordance Reg. 1.408-2(e)(5)(vi)), and,

    2. Four percent of the value (determined as of the most recent valuation date) of all of the assets it holds in fiduciary accounts non-passively. The NBT is non-passive if it (or a member of a controlled group of corporations (within the meaning of IRC 1563(a)) to which the NBT belongs) renders investment advice, makes investment decisions, or directly or indirectly controls the investment activity of the fiduciary accounts.

    Minimum Net Worth at the end of the NBT’s most recent taxable year = The greater of $100,000 or (value of passive accounts x 2%) + (value of non-passive accounts x 4%). (Reg. 1.408--2(e)(5)(ii)(B)).

    Members of Securities Investor Protection Corporation (SIPC) may use the special rule provided at Reg. 1.408-2(e)(5)(ii)(D) to reduce its minimum net worth requirement.
    To maintain its existing accounts during the current year, the NBT must take whatever lawful steps are necessary (including the relinquishment of fiduciary accounts) to ensure that its net worth (determined as of the close of each taxable year) exceeded: The greater of $50,000 or the sum of —
    1. One percent of the value (determined as of the most recent valuation date) of all of the assets it holds in fiduciary accounts passively. The NBT is passive if it (or a member of a controlled group of corporations (within the meaning of IRC 1563(a)) to which the NBT belongs) does not render investment advice, make investment decisions, or directly or indirectly control the investment activity of the fiduciary accounts. An NBT is not passive if any of the fiduciary accounts are maintained in a common investment fund (within the meaning of Reg. 1.408-2(e)(5)(viii)(C) in accordance Reg. 1.408-2(e)(5)(vi)), and,

    2. Two percent of the value (determined as of the most recent valuation date) of all of the assets it holds in fiduciary accounts non-passively. The NBT is non-passive if it (or a member of a controlled group of corporations (within the meaning of IRC 1563(a)) to which the NBT belongs) renders investment advice, makes investment decisions, or directly or indirectly controls the investment activity of the fiduciary accounts.

    Minimum Net Worth determined as of the close of each taxable year = the greater of $50,000 or (value of passive accounts X 1%) + (value of non-passive accounts X 2%). See Reg. 1.408-2(e)(5)(ii)(C).

    Members of SIPC may use the special rule provided at Reg. 1.408-2(e)(5)(ii)(D) to reduce its minimum net worth requirement.

  13. With regard to the audits required by Reg. 1.408-2(e)(5)(iii), verify that at least once during each period of twelve months, the NBT causes a detailed audit of its fiduciary books and records to be made by a qualified public account. Verify that during the audit, the NBT ascertained whether the fiduciary accounts were administered in accordance with law, the NBT’s rules of fiduciary conduct, and sound fiduciary principles. Verify that the audits were conducted in accordance with generally accepted auditing standards and involve whatever tests of the fiduciary books and records of the NBT are considered necessary by the qualified public account.

    Note:

    If the NBT is regulated, supervised, and subject to periodic examination by a State or Federal agency, the NBT may adopt an adequate continuous audit system in lieu of the periodic audits required by Reg. 1.408-2(e)(5)(iii)(A) as long as the continuous audit system includes ascertaining whether the fiduciary accounts have been administered in accordance with law, these rules of fiduciary conduct, and sound fiduciary principles. The continuous audit system must be conducted in accordance with generally accepted auditing standards and shall involve whatever tests of the fiduciary books and records of the NBT are considered necessary by the auditor.

  14. Verify that the report of the audits and examinations required by Reg. 1.408-2(e)(5)(iii) together with the action taken thereon is noted in the NBT’s fiduciary records.

  15. Verify that funds held in a fiduciary capacity, by the NBT, awaiting investment or distribution are not held uninvested or undistributed any longer than is reasonable for the proper management of the account. Reg. 1.408-2(e)(5)(iv).

  16. Verify that except for investments pooled in a common investment fund (within the meaning of Reg. 1.408-2(e)(5)(viii)(C) in accordance Reg. 1.408-2(e)(5)(vi)) the investments of each account will not be commingled with any other property. Reg. 1.408-2(e)(5)(v)(A).

  17. Verify that the assets of accounts requiring safekeeping are deposited in an adequate vault and a permanent record is kept of assets deposited in or withdrawn from the vault. (Reg. 1.408-2(e)(5)(v)(B).

  18. If the NBT maintains a common investment fund (as defined in Reg. 1.408-2(e)(5)(viii)(C)), verify that:

    1. The NBT is authorized under applicable law to administer a common investment fund. Reg. 1.408-2(e)(5)(vi).

    2. The pooling of the assets in a common investment fund is not in contravention of the plan documents or applicable law. Reg. 1.408-2(e)(5)(vi).

    3. The common investment fund is administered in accordance with Reg. 1.408-2(e)(5)(vi)(A) through (F). Reg. 1.408-2(e)(5)(vi).

    4. The NBT’s rules of fiduciary conduct does not contain and is not operating under any provisions applicable only to passive NBTs.

  19. Verify that the NBT keeps its fiduciary records separate and distinct from other records and retained for as long as the contents thereof may become material in the administration of any internal revenue law. Reg. 1.408-2(e)(5)(vii).

  20. Verify that the fiduciary records contain full information relative to each account. Reg. 1.408-2(e)(5)(vii)(A).

  21. Verify that the NBT keeps an adequate record of all pending litigation to which it is a party in connection with the exercise of fiduciary powers. Reg. 1.408-2(e)(5)(vii)(B).

4.72.18.3.4  (04-22-2011)
Changes Experienced by the NBT Revealed During the Interview

  1. If the approved NBT has experienced any changes that affect the continuing accuracy of any representation made in its NBT application, have the NBT prepare a letter (Notice of Change) pursuant to Reg. 1.408-2(e)(6)(iv) addressed to the Service. See IRM 4.72.18.2 (7).

    1. Include the Notice of Change in the NBT investigation case file.

    2. Report in the Transmittal Sheet to the Director, EP Division that a Notice of Change is included in the NBT investigation case file. See Exhibit 4.72.18-7.

  2. The Notice of Change must include the following:

    1. A description of the change.

    2. The reason for the change (cosmetic or business).

    3. A statement that no other representation made in its original application has materially changed.

  3. Examples of changes include:

    1. A name change.

    2. A change in Employer Identification Number (EIN). (The EIN is different from the EIN used in the NBT’s application or on the NBT’s Notice of Approval issued by Headquarters.)

    3. An address change.

    4. An applicant who was approved to serve as a passive trustee is now accepting non-passive accounts.

    5. An applicant will start handling accounts that are not described in the Notice of Approval.

    6. An applicant has experienced an acquisition, merger, consolidation, or some other type of reorganization.

4.72.18.3.5  (04-22-2011)
Post Interview

  1. After interviewing the NBT, complete the NBT Investigation Checksheet / Workpaper by detailing, documenting, and commenting on the findings of each aspect covered in the IDR and interview questions. The NBT Investigation Checksheet/Workpaper replaces the Forms 5772/5773 and is the primary work paper to be used.

  2. If needed, request and or research for additional information to cross-reference information obtained from the NBT by using "yK1/Y-Works" , information returns issued by the NBT using IRPTR(R) and RICS, Asset Locator data, and any other internet research.

  3. Information narratives not included in the Checksheet/Workpaper and documents submitted by the NBT should be numbered and referenced to the Checksheet/Workpaper.

4.72.18.4  (04-22-2011)
Closing Procedures

  1. The NBT will be notified by letter of the results of any investigation conducted with respect to their continued qualification as an NBT.

  2. The Agent conducting the investigation will prepare the letter for the signature/stamp of the Director, EP Examinations, as described below:

    IF THEN
    a. No problems are discovered, 1. Prepare a favorable closing letter (see Exhibit 4.72.18-5) and enclose the closing letter in the investigation case file. Headquarters will forward the letter to the NBT after they review the case file.
    2. Include a statement that: "Based upon the results of the nonbank trustee/custodian investigation we recently conducted, we have determined that [NBT’s Name] is operating within the requirements applicable to nonbank trustees/custodians under Reg. 1.408-2(e) of the Income Tax Regulations. "
    b. Minor problems (deficiencies) are discovered which do not require revocation of the Notice of Approval, 1. Prepare a favorable closing letter that has an enclosure listing minor deficiencies that must be corrected. See Exhibit 4.72.18-6
    2 Enclose the closing letter and list of deficiencies in the investigation case file. Headquarters will send the letter to the NBT after they review the case file.
    3. Include a statement that:
    "Based upon the results of the nonbank trustee/custodian investigation we recently conducted, we have determined that generally [ NBT’s NAME] is operating within the requirements applicable to nonbank trustees/custodians under section 1.408-2(e) of the regulations. However, certain minor deficiencies were noted. Enclosed is an explanation of the deficiencies that must be corrected."

  3. The letter must also include the following:

    1. A statement indicating the investigation is not an examination under section 7605(b) of the Internal Revenue Code.

    2. The name and telephone number of a person to contact.

    3. Signature/stamp of the Director, EP Examinations (or delegate).

    Note:

    The letter will be sent to the NBT by Headquarters after the case is reviewed. Under no circumstances should a closing letter of any type be issued to the NBT from any office other than Headquarters.

  4. Prepare a Transmittal Sheet (see Exhibit 4.72.18-7) addressed to the Director, EP Division. Include in the Transmittal Sheet the following:

    1. The NBT’s name.

    2. A statement that the NBT was investigated pursuant to IRM 4.72.18.

    3. A recommendation as to whether the NBT should be issued a favorable closing letter (see Exhibit 4.72.18-5), a favorable closing letter listing minor deficiencies (see Exhibit 4.72.18-6), or a proposed revocation letter (the proposed revocation letter is prepared by Headquarters).

    4. The rational for the recommendation.

    5. Any other relevant or pertinent information (such as a Notice of Change or a withdrawal request is included in the NBT investigation case file).

  5. Consider the following examples for the rationale for the recommendation.

    IF the recommendation is: THEN the rationale is (for example):
    a. That Headquarters issue a favorable closing letter, The NBT meets all of the applicable NBT requirements.
    b. That Headquarters issue a favorable closing letter that lists deficiencies, The NBT violates Reg. section(s) [specify the Reg. sections (such as 1.408-2(e)(5)(i)(A)(2), 1.408-2(e)(5)(B), etc.)].

    Note:

    A closing letter listing minor deficiencies should not be recommended for the violation of Regs. 1.408-2(e)(5), 1.408-2(e)(5)(i)(A)(1), 1.408-2(e)(5)(ii)(B) and (C), 1.408-2(e)(5)(iii), or 1.408-2(e)(5)(iv). A recommendation of revocation is required for the violation of any of these regulations.

    c. That Headquarters issue a proposed revocation letter, One of the following examples:
    1. The determination of the NBT’s fiduciary policies, the investment and disposition of property held by the NBT in a fiduciary capacity, and the direction and review of the actions of all employees (hire-fire relationship) utilized by the NBT in the exercise of its fiduciary powers are not the responsibility of the NBT’s owners, directors or designated employees but are the responsibility of a third party. Reg. 1.408-2(e)(5)(I)(A)(1).

    2. The NBT’s net worth is not adequate as determined by Reg. 1.408-2(e)(5)(ii)(B) and (C), or

    3. The NBT is not causing the audits required by Reg. 1.408-2(e)(5)(iii).

    4. Funds held by the NBT awaiting investment or distribution are not being invested or distributed within a reasonable amount of time (Reg. 1.408-2(e)(5)(iv)).

    5. Investments that are not in a common investment fund (within the meaning of Reg. 1.408-2(e)(5)(viii)(C) that meets the requirements of Reg. 1.408-2(e)(5)(vi)) or investments of accounts established under IRC 408(q) on or after August 1, 2003, are commingled with other property. Reg. 1.408-3(e)(5)(v).

  6. Print out all the information for transmittal to Headquarters and assemble the case file from top to bottom as follows:

    Outside Front Inside Right:
    Transmittal Sheet Favorable Closing Letter (if applicable)
      Checksheet/Workpapers/Interview Notes
      Form 2848 (if applicable)
      Case Chronology Record (CCR)
      Investigation Correspondence between the Service and the NBT, in chronological order (most recent on top)
      All documents secured during the investigation (indexed to the checksheet/workpaper), such as Financial Statements, Auditors’ Reports, net worth computations, Fidelity Bond, etc.
      NBT Application File
      IDRS Research

  7. Forward the closed NBT investigation case file to Headquarters for review, through their Manager, to the following address:

    [Assigned HQ Coordinator Name]
    Internal Revenue Service
    SE:T:EP:RA:T1
    1111 Constitution Avenue NW PE
    Washington, DC 20224

  8. Use one of the following Disposal Codes to close the case:

    1. Disposal Code 01 (RCCMS Code 210) - withdrawal request (Regulatory/Revenue Protection).

    2. Disposal Code 02 (RCCMS Code 107) - no change/no problems found.

    3. Disposal Code 08 (RCCMS Code 206) - no change/minor deficiencies noted.

    4. Disposal Code 09 (RCCMS Code 211) - proposed revocation.

  9. Use Issue Code 36z for all NBT cases, regardless of disposal code.

  10. The Agent will update the case on RCCMS and NMF AIMS to suspense Status Code 38. Do not close the case.

  11. After Headquarters reviews the file and sends the closing letter, Headquarters will notify the Agent, Group Manager, and the EP Classification via E-mail (addressed to EP Classification and copied to the Manager and Agent) that the case can be closed from RCCMS and NMF AIMS.

  12. Headquarters will prepare and attach to the E-mail a disposition memo (addressed to EP Classification). The disposition memo will explain how the NBT investigation case was disposed so that the appropriate disposal code is used. The Agent will include the NBT Disposition Memo in RCCMS.

  13. The Group Manager will fax a copy of the Form 5599 closing document and Form 5595 (for the Status Code 51 NMF AIMS update) to EP Examinations, Support Processing (ESP) to notify them that the case is ready for closing. The ESP fax number is (718) 488-2332. A paper file will not be available for ESP because the paper file will be retained by Headquarters.

  14. The closed NBT investigation case file will be electronically scanned by Headquarters. The electronically scanned file will be stored with EP Rulings and Agreements closed cases and placed in the appropriate NBT electronic folder.

  15. If the investigation report raises any "red flags" during review by Headquarters, the investigation case file may be returned to the agent through his or her manager for additional information or further development of specific facts and circumstances to determine if any further action is necessary.

4.72.18.5  (04-22-2011)
Recertification

  1. Each year, after September 30 and before December 31 the EP Compliance Unit (EPCU) will contact each approved NBT that was not selected for investigation during that year and certify that the NBT wishes to retain its Notice of Approval.

  2. The recertification process will be initiated by EPCU by issuing a 30-day letter on or about October 1 to all NBTs that were not selected for investigation during that year.

  3. The 30-day letter should:

    1. Seek verification that the NBT wishes to retain its notice of approval

    2. Seek verification of the NBT’s current address

    3. Identify the names of individuals and/or points of contact for the NBT where future correspondence can be sent

    IF THEN
    If an NBT does not want to retain its Notice of Approval: It must provide a written statement that it is no longer serving as an NBT, wishes to withdraw its NBT application, and wants to have its name removed from the list of approved NBTs. The written statement must also disclose whether the accounts were transferred to another entity or distributed to the account owner. In the case of a transfer, the statement should include (if available) the transferee’s name, address, telephone, and person to contact.
    If a response is not received from a NBT within 30 days, EPCU will do internet and/or IDRS research to determine a reason for the failure of the NBT to respond to the 30-day letter.
    If the research reveals a new address for the NBT, EPCU will send another 30-day letter to the new address.
    If the research does not provide a new address or any other useful information about the NBT’s location or there is no response to the second 30-day letter, EP Rulings and Agreements at Headquarters will, pursuant to Reg. Reg. 1.408-2(e)(7)(v)(E), immediately suspend the NBT’s notice of approval by issuing a letter to the NBT’s address on file. Upon issuance of the suspension letter, the NBT will be removed from the list of approved NBTs that is maintained by EP Rulings and Agreements. The letter will notify the NBT of the suspension and propose revocation of the notice of approval pursuant to Reg. 1.408-2(e)(7)(v). The letter will be sent in a manner that will certify its delivery.
    If the NBT responds to the 30-day letter within 30 days or the 60-day letter within 60 days as prescribed by Reg. 1.408-2(e)(7)(v)(C) and declares that it wishes to retain its notice of approval, the NBT’s name will be placed back on the list of approved NBTs
    If the NBT does not respond within 60-days as prescribed by Reg. 1.408-2(e)(7)(v)(C) or (D) the Director, EP Rulings and Agreements at Headquarters will revoke the NBT’s notice of approval.
    If an approved NBT does not certify that it wishes to retain its notice of approval or the approved NBT cannot be located, the approved NBTs notice of approval will be revoked, by EP Rulings and Agreements at Headquarters, and its name will be removed from the list of approved NBTs.

4.72.18.6  (04-22-2011)
Abbreviated Compliance Checks

  1. In lieu of a complete NBT investigation, EP Exam (coordinated by EPCU) may conduct a short check for compliance with the NBT regulations at Reg. 1.408-2(e). The compliance check will consist of a short questionnaire sent to select NBTs for the following key items in the regulations that will be evaluated to determine if a full NBT investigation should occur:

    1. Continuity

    2. Capacity to Account

    3. Bonding

    4. Adequacy of Net Worth

    5. Court Action/Bankruptcy

    6. Passive or Non-Passive (Active)

Exhibit 4.72.18-1 
Sample Appointment Letter

Sample Appointment Letter

NOTE: Use Letterhead

Internal Revenue Service Department of the Treasury
TE/GE Employee Plans  
Date: Date of Appointment:

Time of Appointment:

Place of Appointment:

Person to Contact/Badge Number:

Telephone Number:
   
Dear Sir or Madam:  

As a Non-bank trustee, you have been selected for an investigation to test compliance with the requirements of Regs. 1.408-2(e)(2) through 1.408-2(e)(5)(viii)(F). To help make the investigation as brief as possible, please have the items available that I have requested at the end of this letter.

If you have any questions or cannot keep the scheduled appointment, please contact me at the telephone number shown above.

Thank you for your cooperation.

  Sincerely,
   
   
  Agent Name
Employee Plans Specialist
   
Enclosure:
Information Document Request
Disclosure Statement
 

Exhibit 4.72.18-2 
Sample Information Document Request

Sample Information Document Request

Internal Revenue Service Department of the Treasury
 
Information Document Request (IDR)

Please have the following items available for inspection:

(1) A list of owners with their percentage of ownership.

(2) The Corporate Charter and Articles of Incorporation.

(3) The by-laws, operating procedures, or some other document containing the rules of fiduciary conduct.

(4) A copy of the Organizational Chart.

(5) A copy of the fidelity bond (or some other type of insurance) for all employees handling fiduciary accounts.

(6) Provide your adequacy of net worth calculations as of the end of the most recent taxable year for purposes of Regs. 1.408-2(e)(5)(ii)(B) and (C) or (D), if applicable.

  1. Make sure the valuation date being used is specified in the calculation and ties to the supporting documentation.

  2. Provide documentation to support:
    1. The valuation report of the fiduciary accounts.
    2. The value of all other accounts.
    3. The audited financial statements that were prepared in accordance with Generally Accepted Accounting Principles (GAAP), which include the auditor's comments. Please tie the net worth used in the calculation back to the net worth reflected in these financial statements.

7. Provide:

  1. The audit of your fiduciary books and records as required by Reg. 1.408-2(e)(5)(iii)(A) or (B).

  2. If applicable, a copy of your Sarbanes-Oxley compliance report.

8. The report/records generated under Reg. 1.408-2(e)(5)(iii)(C) relating to the audit required by Reg. 1.408-2(e)(5)(iii)(A) or (B) together with the action taken thereon.

9. Be prepared to provide a sample of the reports required by Regs. 1.408-5, 1.408-6, and 1.408-7, dealing with annual reports by trustees, disclosure statements, and reports on distributions, respectively, issued to fiduciary account owners during the most recent tax year.

10. A copy of the aging report of accounts payable as of the latest period available.

11. Personnel folders of the employees specified in the next item below handling the fiduciary accounts.

12. Please arrange separate meetings (one immediately after the other) at the time of the on-site meeting, with:

  1. The head of the Trust Department and the supervisor/manager of the trust personnel to gain an understanding of the internal controls and the systems utilized for accounting for the assets of the fiduciary accounts. The meeting should not take longer than two hours.

  2. A few (not more than 7) randomly selected employees who handle the fiduciary accounts to verify that the controls are working and to gain an understanding of their experience with handling fiduciary accounts.

Exhibit 4.72.18-3 
Disclosure Statement

Nonbank Trustee ("NBT" ) Investigation Disclosure under the Freedom of Information Act

All submissions by an NBT and information gathered by the Service during an NBT investigation are subject to requests under the Freedom of Information Act (FOIA). The FOIA, however, does not require the IRS to release all documents that are subject to FOIA requests. The IRS may withhold information pursuant to nine exemptions and three exclusions contained in the FOIA statute.

The two most likely FOIA exemptions potentially applicable to information contained in NBT investigation files are FOIA exemptions (b)(3) and (b)(4). 5 USC sections 552(b)(3) and (b)(4).

FOIA exemption (b)((3) requires agencies to withhold information specifically exempted from disclosure by statue Section 6103 of the Internal Revenue Code specifically exempts from disclosure returns and return information and may be employed with FOIA exemption (b)(3) to withhold such information otherwise responsive to a FOIA request.

FOIA exemption (b)(4) protects from disclosure commercial or financial information obtained from a person and privileged or confidential information. Courts have interpreted this exemption to mean that commercial and financial information other than trade secrets can be withheld from disclosure only if it meets the following criteria: it must be privileged or confidential, and it must be obtained from a person by the government. Information has been found by the courts to be confidential if its disclosure would be likely to: (1) impair the government's ability to obtain similar information in the future, or (2) harm the competitive position of the person who supplied it. In response to a FOIA request, the Service will make deletions pursuant to FOIA exemption (b)(3) in connection with section 6103 of the Code and FOIA subsection (b)(4) before information is made available to the public in order to protect the confidentiality of return information and the privacy of privileged or confidential information of the NBT as appropriate. To help the Service make the necessary deletions of privileged or confidential information under FOIA exemption (b)(4), the NBT must provide during the investigation a statement indicating the deletions desired (deletions statement). An NBT who wants only names, addresses, and identifying numbers deleted should state this in the deletions statement. An NBT who wants more information deleted must provide a copy of its submissions and supporting documents on which the NBT has placed brackets around the material to be deleted.

The deletions statement must not appear within the material submitted by the NBT. Instead, the deletions statement is to be made in a separate document that is signed and dated by the NBT or the NBT’s authorized representative. A stamped signature or faxed signature is not permitted.

The NBT should follow this same process to propose deletions from any additional information submitted after the initial deletions request. An additional deletions statement is not required with each submission of additional information if the NBT's initial deletions statement requests that only names, addresses, and identifying numbers are to be deleted and the NBT wants only the same information deleted from the additional information.

Exhibit 4.72.18-4 
Sample Interview Questions

Sample Interview Questions

Nonbank Trustee (NBT) Investigations Interview Questions

History-Interview Questions:


Ask to take a tour of the Trust Department/Area.

Conduct first interview with the Head of Trust Department or the Supervisor of Trust personnel to gain an understanding of the internal controls and the systems utilized for accounting for the assets of the fiduciary accounts. The meeting should not take longer than two hours. Then, interview several trust department employees (see last two items of IDR).

Part I - Ownership
(Workpaper Part II A 1 Continuity) (Item 1 of IDR)

1. Describe the ownership of the NBT.




a. Is it publicly traded?
□ Yes □ No


b. Does it have a parent that is publicly traded?
□ Yes □ No


c. Does any owner (stockholder/partner) own more than 20% of the NBT?
□ Yes (see below) □ No

If the answer to 1c is “yes” then,
(i) What are the owner’s names and ownership percentages?



(ii) Do those owners, who own more than 20%, own more than 50% in the aggregate?
□ Yes (see below) □ No

Part II — Trust Personnel
(Workpaper Part II A 3— Fiduciary Expertise, Part II A 4 B - Capacity to Account, 4 C —Fitness to handle funds) (Item 4 & 11 on IDR)

1. What are the names of the Trust Department employees?

2. How many years have they been with the NBT?

3. How many years have they been in this field?

4. What are their job responsibilities?

  • Who directs and monitors actions of employees?

  • Who maintains records for federal tax purposes?

  • Who prepares 1099s?

  • Who prepares 5498 statements?

  • Who calculates net worth requirements?

  • Who performs calculations of income?

  • Who prepares the distributions?

  • Who issues certificates of ownership?

Part Ill — Trust (and other business) Operations


1. What are the NBT’s normal business hours?
(Workpaper Part II A 2— Established Location)

2. What type of fiduciary accounts does the NBT hold:
(Workpaper Part I C - Types of Accounts)

□ 401(f) □ 403(b)(7) □ 457(b)
□ IRAs under 408(a), (c), (h), (k), or (q) □ 530 □ Archer Medical under 220
□ Health Savings under 223 □ Other:  


3. a. How many fiduciary accounts does the NBT maintain?
(Workpaper Part II A 4 B — Capacity to Account)

b. What is their aggregate value?

4. a. Is investment advice given by the NBT or any related entity?
□ Yes (see below) □ No

b. If “yes”, how often?

c. Does the NBT consider its self a passive or non-passive NBT?
(Workpaper Part II A 4 C —Fitness to Handle Funds)
□ Passive □ Non-passive

5. a. What other types of accounts are maintained?
(Workpaper Part II A 4 C — Fitness to Handle Funds)

b. How many of these other types of accounts are maintained?

c. What is their aggregate value?


6. If fiduciary and non-fiduciary accounts are maintained:
a. Is a separate trust division with separate personnel and facilities maintained?
□ Yes □ No (see below)
b. If not, does the trust department maintain a separate identity? Please describe. (Workpaper Part II A 4 D 1 (f))
c. Does the NBT keep separate and distinct records for fiduciary accounts? Please describe. (Workpaper Part II A 4 D 7 (a))
□ Yes □ No
d. How long are those records maintained?
(Workpaper Part II A 4 D 7 (a))

7. a. Are separate investment accounts maintained for each account holder?
(Workpaper Part II A 4 D 5 (a))
□ Yes □ No
b. Does the NBT have pooled investment accounts?
(If yes, contact National Office for guidance.)
□ Yes □ No

8. Describe how accounts are handled from inception to closure:
a. Who is responsible for receiving investment funds when a new account is opened and how is this done?

b. What is the time lag between receipt of new monies and their investment?
(Workpaper Part II A 4 D 4)

c. What type of documentation is given to the new account holder?
(Workpaper Part II A 4 D 1 b)

i. When a new fiduciary account is established does the NBT provide the individual with a copy of their Notice of Approval?
(Workpaper - Other Regulations - 10 Miscellaneous)
□ Yes □ No
d. How are buy/sell orders executed?

i. What type of documentation is generated?

e. How does a customer initiate account closure?

i. What is the time frame between request for funds and actual disbursement of fund?

ii. What type of documentation is given when the account is closed out? (Workpaper Part II A 4 D 1 b) & (Workpaper Part II A 4 D 4)

f. Aside from servicing accounts, what other services/products are available through the NBT? (Workpaper Part II A 3 Fiduciary Experience, Part II A 4 B Capacity to Account, Part II A 4 C Fitness to handle funds)

Part IV — Miscellaneous Business Operations

1. a. Is the NBT the subject of any ongoing litigation?
□ Yes (see below) □ No
b. If so, please explain the matter. (Workpaper Part II A 4 D 7)

2. a. Does the NBT employ or retain legal counsel versed in fiduciary matters? (Workpaper Part II A 4 D 1 e)
□ Yes □ No
b. Who are they (name of firm or individual)?
c. Are they in-house or on retainer?
□ In-House □ On Retainer


3 a. Are employees bonded?
(Workpaper Part II A 4 D 1 d)
□ Yes □ No
b. If so, which employees?

4. Is there a safe or vault to keep assets?
□ Yes □ No

5. Is there a permanent record of assets going into and out of the safe/vault?
(Workpaper Part II A 4 D 5 b)
□ Yes □ No

Part V - Accounting and Auditing.

1. How often are Trust assets evaluated for performance objective?
(Workpaper Part II A 4 D 1 c)

2. a. How often are Trust assets valued?
b. What were the last two valuation dates?
c. How is FMV determined?
(Workpaper Part II A 4 D 2 d)

d. How often are audits of fiduciary assets conducted?
e. What were the dates of the last two audits?
(Workpaper Part II A 4 D 3 a (1)-(3) & c)

f. Who performs the audit?
g. How is the audit used?
h. Who reviews the audit?
i. Are the audit recommendations followed?
□ Yes □ No
j. Where are these actions documented?

3. a. Is the NBT regulated by either a State or Federal Agency?
(Workpaper Part II A 4 D 3 b)
□ Yes (see below) □No
b. If “yes”, does the Agency require periodic examinations of the audit systems (if “yes” obtain copy)
c. If ‘yes”, does this supersede the certified audit requirement?

Exhibit 4.72.18-5 
Sample Favorable Closing Letter

Sample Favorable Closing Letter

NOTE: Use Letterhead

Internal Revenue Service Department of the Treasury
TE/GE Employee Plans  
Date: Taxpayer Identification Number:
  Person to Contact/Badge Number:
  Telephone Number:
Name
Street Address
City, State, Zip
 
   

Dear Sir or Madam:

On [insert date], you were issued a Notice of Approval authorizing [insert name of NBT] to act as a nonbank custodian of plans qualified under section 401 of the Internal Revenue Code, as a custodian of custodial accounts described in section 403(b)(7), and as a nonbank trustee or custodian for IRAs established under section 408. In the Notice of Approval, you were advised that continued approval would be contingent upon the continued satisfaction of the criteria set forth in section 1.408-2(e) of the Income Tax Regulations (regulations).

Based upon the results of the nonbank trustee/custodian investigation we recently conducted, we have determined that generally, [insert name of NBT] is operating within the requirements applicable to nonbank trustee/custodian under section 1.408-2(e) of the regulations.

This investigation was not an examination under section 7605(b).

If you have any questions regarding these findings, please contact the individual listed above.

  Sincerely,
   
   
  [Insert Name]
Director, Employee Plans Examinations

Exhibit 4.72.18-6 
Sample Favorable Closing Letter with Deficiencies

Sample Favorable Closing Letter with Deficiencies

NOTE: Use Letterhead

Internal Revenue Service Department of the Treasury
TE/GE Employee Plans  
Date: Taxpayer Identification Number:
  Person to Contact/Badge Number:
  Telephone Number:
Name
Street Address
City, State, Zip
 
   

Dear Sir or Madam:

On [insert date], you were issued a Notice of Approval authorizing [insert name of NBT] to act as a nonbank custodian of plans qualified under section 401 of the Internal Revenue Code, as a custodian of custodial accounts described in section 403(b)(7), and as a nonbank trustee or custodian for IRAs established under section 408. In the Notice of Approval, you were advised that continued approval would be contingent upon the continued satisfaction of the criteria set forth in section 1.408-2(e) of the Income Tax Regulations (regulations).

Based upon the results of the nonbank trustee/custodian investigation we recently conducted, we have determined that generally, [insert name of NBT] is operating within the requirements applicable to nonbank trustee/custodian under section 1.408-2(e) of the regulations. However, certain minor deficiencies were noted. Enclosed is an explanation of the deficiencies and the corrective action.

This investigation was not an examination under section 7605(b).

If you have any questions regarding these findings, please contact the individual listed above.

  Sincerely,
   
   
  [Insert Name]
Director, Employee Plans Examinations

List of Deficiencies

1. Section 1.408-2(e)(5) of the Income Tax Regulations provides that the [nonbank trustee] applicant must demonstrate that the rules of fiduciary conduct specified in section 1.408-2(e)(5)(i) through (viii)(F) of the regulations are incorporated in operating procedures, by-laws, or some other document that controls the applicant’s activities. Compliance with this requirement can be demonstrated by the following:

  • Compliance with this requirement may be demonstrated by a resolution of the NBT’s board of directors (or its equivalent) adopting the rules of fiduciary conduct and a copy of the document or the appropriate section of the document that contains the rules of fiduciary conduct as adopted by the board of directors. The rules of fiduciary conduct may not be incorporated by reference.

  • In lieu of the above demonstrations, the NBT may provide evidence it is operating under applicable statutory requirements either under state or federal law, which mirror the rules of fiduciary conduct.

During the application process, you submitted evidence that such a document exists. However, during the nonbank trustee investigation for continued compliance, you were not able to show evidence that such a document containing the language found at I.408-2(e)(5)(i) through 1.408-2(e)(5)(viii)(F) exists. The absence of this document is a violation of section I.408-2(e)(5). Therefore, please see to it that such a document comes into existence before you are selected for another investigation for continued compliance.

2. Section I.408-2(e)(5)(i)(B) provides that all employees taking part in the performance of the applicant’s fiduciary duties will be adequately bonded. The Bond you submitted during the investigation does not name (insert name of NBT) (the approved nonbank trustee under investigation) as an insured. In addition, there is no evidence in the investigation case file that you have hire-fire power over the employees of the named insured on the bond you submitted during the investigation. Therefore, it appears that, section I.408-2(e)(5)(i)(B) is not currently satisfied.

3. There are statements from you in the investigation case file that (insert name of NBT) (the approved nonbank trustee) was a participant in a merger. Therefore, it is understandable that there may have been a name change, change in employer identification number, or the end of the existence of (insert name of NBT) in favor of the surviving entity of the merger who has not demonstrated to the service that it meets the nonbank trustee requirements.

Paragraph two on page three of your notice of approval (best available copy available enclosed) to serve as a nonbank custodian provides:
“This approval letter is not transferable to any other entity. An entity that is a member of a controlled group of corporations, within the meaning of section 1563(a) of the Code, may not rely on an approval letter issued to another member of the same controlled group. Furthermore, any entity that goes through an acquisition, merger, consolidation or other type of reorganization may not necessarily be able to rely on the approval letter issued to such entity prior to the acquisition, merger, consolidation, or other type of reorganization. Such entity may have to apply for a new notice of approval in accordance with section 1.401-12(n) [now 1.408-2(e)] of the regulations.”

The first full paragraph on page three of your notice of approval to serve as a nonbank custodian provides that (insert name of NBT) is required to notify the Commissioner of Internal Revenue in writing of any changes which affects the continuing accuracy of any representations made in its application.” [Section 1.408-2(e)(6)(iv) of the regulations]

4. Section 1.408-2(e)(7)(iii) of the regulations provides that the [NBT] applicant must not accept a fiduciary account until after the plan administrator or the person for whose benefit the account is to be established is furnished with a copy of the written notice of approval issued to the applicant.

Based on items 1, 2, 3, and 4 above, it appears that you may have violated sections 1.408-2(e)(5), I.408-2(e)(5)(i)(B), I.408-2(e)(6)(iv), and I. 408-2(e)(7)(iii) of the regulations. You now have the opportunity to ensure that you are in compliance with these nonbank trustee requirements.

Exhibit 4.72.18-7 
Nonbank Trustee Transmittal Sheet

Nonbank Trustee Transmittal Sheet

Nonbank Trustee Transmittal Sheet

Complete this form at the conclusion of the investigation. It is used to provide a synopsis of the results of the investigation.

Nonbank Trustee Entity Information

Name: __________________________ TIN:___________________________
Address:_________________________
_____________________________
_____________________________
_____________________________
 
Contact Name: ____________________ Contact Phone Number:_____________
   
Results of the Investigation
Regulations Met? Yes □ No □
Recommended Closing
□ No Change (Include draft of No Change Letter in the file.)
□ No Change with Issues (Include draft of No Change Letter in the file.)
□ Revocation (Headquarters will prepare closing letter.)
□ Withdrawal (Headquarters will prepare closing letter.)

Rationale for the Conclusion
Briefly explain your conclusion, key findings or issues and the rationale. Other Issues or Concerns
Briefly explain any issues or concerns that should be brought to the attention of Headquarters

Agent Signature:_____________________
Agent Name:____________________
Date:____________________
Phone Number:________
   
Manager Signature:__________________
Group Manager Name:____________
Date: ____________________
Phone Number:_________


More Internal Revenue Manual