4.72.18 Nonbank Trustee Investigation Procedures

Manual Transmittal

October 29, 2019

Purpose

(1) This transmits revised IRM 4.72.18, Employee Plans Technical Guidance, Nonbank Trustee Investigation Procedures.

Material Changes

(1) Added new section 4.72.18.1.5, Contact Information for Business Units. Having all contact information in one section facilitates finding and updating contact information.

(2) Revised IRM 4.72.18.4.2, Prepare for the NBT Investigation, to incorporate the October 5, 2018 memorandum from the Acting Director, Employee Plans entitled, Single Type of Examination (Internal Guidance Memo (IGM) TEGE 04-1018-0024). This memo eliminates the Office Correspondence Examination Program (OCEP) effective October 4, 2018. Instead there will be a single type of examination that allows the agent and the group manager to determine, on a case by case basis, whether a visit to the taxpayer’s place of business is appropriate or if the examination should be worked through correspondence.

(3) Updated the NBT Shared Drive link in IRM 4.72.18.3.1, Selection for Investigation.

(4) Added "Note" in IRM 4.72.18.4, Establishing the NBT Investigation Case, regarding use of the "EE" alpha code.

(5) Revised IRM 4.72.18.5, Case Closing Steps - No Change or No Change with Deficiencies, to instruct the field group manager to contact the Manager, EP Mandatory Review before closing any case to Mandatory Review.

(6) Revised IRM 4.72.18.8, Case Closing Steps – Survey Before or After Assignment, to incorporate the October 2, 2018 memorandum from the Acting Director, Government Entities/Shared Services entitled, Revised Process for Surveying a Case When Using Certain Non-examination Disposal Codes (IGM TEGE 04-1018-0022).

Effect on Other Documents

This supersedes IRM 4.72.18 dated April 10, 2018.

Audience

Tax Exempt and Government Entities
Employee Plans

Effective Date

(10-29-2019)

Robert S. Choi
Director, Employee Plans
Tax Exempt and Government Entities

Program Scope and Objectives

  1. Purpose: IRM 4.72.18, Employee Plans Technical Guidance, Nonbank Trustee Investigation Procedures, provides procedural and technical guidance for Employee Plans (EP) agents conducting Nonbank Trustee Investigations (NBTIs). This section will also aid group managers in providing guidance and feedback to agents during and after the NBTI.

  2. Audience: This IRM provides procedures for agents, their group managers and support staff in EP Examinations.

  3. Policy Owner: Director, EP Examinations.

  4. Program Owner: EP Examinations.

  5. Program Authority: EP Examinations’ authority to resolve issues is derived from its authority to make determinations of tax liability under IRC 6201.

  6. Program Goals: The information contained in this IRM is designed to promote quality NBTIs. To achieve this objective, this IRM discusses each requirement contained in 26 CFR 1.408-2(e)(2) through 26 CFR 1.408-2(e)(7)(iii) and provides the steps agents follow to verify compliance. This section provides guidance on initiating and closing the investigation case file.

Background

  1. EP Examinations is the division designated to determine whether an approved nonbank trustee or custodian (NBT) complies with the regulations.

Authority

  1. The authority for conducting NBTIs is primarily provided by 26 CFR 1.408-2(e)(2) through 26 CFR 1.408-2(e)(7)(iii), and the following laws:

    • Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)

    • Small Business Job Protection Act of 1996 (SBJPA)

    • Taxpayer Relief Act of 1997 (TRA ’97)

    • Medicare Prescription Drug, Improvement, and Modernization Act of 2003

Program Controls

  1. Tax Exempt Quality Measurement System (TEQMS) is the quality control system TE/GE uses to oversee the entire examination program. For more information on TEQMS, see IRM 4.70.7, Special Review (SR) and Tax Exempt Quality Measurement System (TEQMS) Procedures.

  2. All investigations will be done in accordance with the Taxpayer Bill of Rights as listed in IRC 7803(a)(3).

    Note:

    Additional information may be found at www.irs.gov/taxpayer-bill-of-rights.

Acronyms and Forms

  1. This manual uses the following acronyms and references the following forms.

    Acronyms

    Acronym Definition
    AIMS Audit Information Management System
    CCR Case Chronology Record
    DC Disposal Code
    EIN Employer Identification Number
    EP Employee Plans
    EPCU Employee Plans Compliance Unit
    ERISA Employee Retirement Income Security Act of 1974
    IDR Information Document Request
    IDRS Information Data Retrieval System
    IRC Internal Revenue Code
    IRA Individual Retirement Arrangements
    MF Master File
    MSA Medical Savings Account
    NMF Non-Master File
    MFT Master File Tax (Code)
    NBT (Approved) Nonbank Trustee or Custodian
    NBTI Nonbank Trustee or Custodian Investigation
    NOA Notice of Approval
    NOC Notice of Change
    R&A Rulings and Agreements
    RCCMS Reporting Compliance Case Management
    SBJPA Small Business Job Protection Act of 1996
    SEC Securities and Exchange Commission
    SIPC Securities Investor Protection Corporation
    TEQMS Tax Exempt Quality Measurement System
    TRA ‘97 Taxpayer Relief Act of 1997
    TEFRA Tax Equity and Fiscal Responsibility Act of 1982
    UBIT Unrelated Business Income Tax

     

    Forms and Schedules

    Form Name
    Form 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
    Form 1900 Income Tax Survey After Assignment
    Form 2848 Power of Attorney and Declaration of Representative
    Form 5498 IRA Contribution Information
    Form 5596 TE/GE Non-Examined Closings
    Form 5599 TE/GE Examined Closing Record
    Form 5772-A Employee Plans (EP) Workpaper Summary
    Form 5773-A Employee Plans (EP) Workpaper Continuation Sheet
    Form 10329 Transmittal Sheet-Related Cases

     

Contact Information for Business Units

  1. Phone, e-fax and email information:

    Group Email Contact Contact Phone Number/ Address
    AIMS Coordinator
    Charles.Mazzarisi@irs.gov

    e-fax: 855-821-0089
    Phone: 718-834-5055
    Classification & Case Assignment (C&CA)

    Note:

    C&CA is a sub-function of Compliance Planning & Classification (CP&C). This IRM refers to C&CA as Classification.

    EOclass@irs.gov
    IRS –Classification & Case Assignment
    1100 Commerce St., Mail Code 4910DAL
    Dallas, TX 75242
    Classification (case establishment on RCCMS and AMIS) Classification - Case Assignment (tege-cpc-classification@irs.gov)  
    EPCU
    heidi.l.hansen@irs.gov
    stella.m.maestas@irs.gov

    EPCU - Odgen:
    Internal Revenue Service
    EPCU TEGE - EP
    c/o EPCU Group Manager
    1973 Rulon White Blvd.
    MS 1113
    Ogden, UT 84201-0251
    Phone: 801-620-4366
    EP Mandatory Review  
    IRS - EP Mandatory Review
    c/o Samantha Nolan
    2970 Market Street
    2-H20-133
    Philadelphia, PA 19104
    Manager, Mandatory Review Steven.Moses@irs.gov
    Phone: 202-317-8575
    e-fax: 877-773-2723
    EP R&A Technical Group 1 (NBT Shared Drive Owner aka Group 7575)
    rosamond.s.ferber@irs.gov
    john.e.old@irs.gov

    Internal Revenue Service
    c/o Manager SE:T:EP:RA:T1
    1111 Constitution Avenue, NW NCA
    Washington, DC 20224
    TE/GE Closing Group 7697 in Baltimore ( for Great Lakes, Gulf Coast and Pacific Coast Areas closing agreed Forms 5500 on RCCMS and AIMS)  
    IRS
    TE/GE Closing Group 7697
    31 Hopkins Plaza
    Room 1550
    Baltimore, MD 21201
    Phone: 443-853-5586
    TE/GE Closing Group 7697 in Brooklyn (for Northeast and Mid-Atlantic Area (including Mandatory Review) groups closing agreed Forms 5500 on RCCMS and AIMS)  
    IRS
    TE/GE Closing Group 7697
    2 Metrotech Center
    100 Myrtle Avenue, 6th Floor
    Brooklyn, NY 11201
    Phone: 718-834-5076

Overview of Nonbank Trustees

  1. This IRM is designed primarily to help EP examinations agents and their managers identify relevant issues relating to NBTIs.

  2. A NBT is a financial entity that is neither a bank (as defined in IRC 408(n)) nor an insurance company (as defined in IRC 816) that received a NOA from the Commissioner. Thus, for purposes of this IRM, the term "NBT" refers to an approved NBT. NOAs are issued by EP Rulings and Agreements (R&A) in response to an application to become an NBT.

    Note:

    A NOA is issued only after the entity demonstrates to the Commissioner’s satisfaction compliance with the requirements in 26 CFR 1.408-2(e)(2) through 26 CFR 1.408-2(e)(6)(v).

  3. A NBT may be authorized to serve as a trustee or custodian for one or more of the tax‑exempt retirement and savings accounts listed below:

    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 408(k) Simplified Employee Pension (SEP) IRAs
    IRC 408(p) Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs
    IRC 457(b) Deferred Compensation Plans of State & Local Government and Tax Exempt Organizations Custodial Accounts
    IRC 530 Coverdell education savings accounts (ESAs) (formerly called Education IRAs)
  4. EP R&A has jurisdiction to approve an entity to serve as an NBT.

  5. EP Examinations investigates NBTs for their continued compliance with the NBT regulations. An investigation differs from an examination. An investigation is not an examination under IRC 7605(b). When revocation of NBT status is proposed, EP Examinations submits its NBTI reports to EP R&A.

Legislation

  1. This table lists the legislative and administrative history of laws affecting NBTs:

    Legal References Effect Effective Date
    Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) Modified IRC 401(d)(1): the requirement that a trustee of a qualified retirement plan benefiting owner-employees ("Keogh" plan) be a bank or an approved NBT no longer applies. However, IRC 401(f) states that the person holding the assets of a custodial account under IRC 401 must be a bank or an approved NBT. Years beginning after December 31, 1983
    26 CFR 1.401-12(n) Revised and moved to 26 CFR 1.408-2(e). See below. December 20, 1995
    Small Business Job Protection Act (SBJPA) Enacted Archer MSAs: IRC 220(d)(1)(B), expanded by Notice 96-53 Q&A-10. Tax years beginning after December 31, 1996
    Taxpayer Relief Act of 1997 (TRA ’97) Enacted Roth IRAs under IRC 408A and Education IRAs under section 530 Tax years beginning after December 31,1997
    Public Law 107-22 Education IRAs renamed Coverdell education savings accounts July 26, 2001
    Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) Added deemed IRAs under IRC 408(q) Plan years beginning on or after January 1, 2003
    Medicare Prescription Drug, Improvement, and Modernization Act of 2003 Enacted health savings accounts. See IRC 223(d)(1)(B) Tax years beginning after December 31, 2003
    SBJPA and TRA ’97 Amended IRC 457 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 26 CFR 1.408-2(e).  
    SBJPA Established a savings incentive match plan under IRC 408(p) Tax years after December 31, 1996
    26 CFR 1.408-2(e) Revised 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. Revised on June 18, 2007

Definitions

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

    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 employee associations per 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))

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

  2. The term "account" or "fiduciary account" under 26 CFR 1.408-2(e)(5)(viii)(A) means:

    1. A trust described in IRC 401(a) (including a custodial account described in IRC 401(f))

    2. A custodial account described in IRC 403(b)(7)

    3. An individual retirement account described in IRC 408(a) (including a custodial account described in IRC 408(h))

      Reminder:

      This regulation was written before the accounts listed below existed or required the trustee or custodian to be: i) a bank (per IRC 408(n)), ii) a bank or an insurance company per IRC 816 (for Archer MSAs and health savings accounts), or iii) an approved NBT.

      • Medical savings accounts - IRC 220(d)(1)(B) and Notice 96-53

      • Health savings accounts - IRC 223

      • Deemed IRAs - IRC 408(q)

      • Roth IRAs - IRC 408A

      • Coverdell education savings accounts - IRC 530

      • Custodial accounts of eligible deferred compensation plans - IRC 457(b)

    Note:

    Therefore, the definition of "account" or "fiduciary account" in 26 CFR 1.408-2(e)(5)(viii)(A) is expanded to include these accounts. Failure to include all of the above accounts as provided in the NBT’s rules of fiduciary conduct may result in miscalculation of the NBTs required minimum net worth.

  3. The term "plan administrator" means an administrator per 26 CFR 1.414(g)-1.

  4. The term "common investment fund" means a trust that both:

    1. Consists of all or part of the assets of several accounts that have been established with the applicant.

    2. Is described in IRC 401(a) and 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 satisfies the requirements of IRC 408(c).

Technical Overview

  1. The trustee or custodian for any of these accounts/plans must be: i) a bank; ii) in the case of an Archer MSA or a health savings account, a bank or an insurance company (per IRC 816); or iii) another person (not an individual) approved by the Commissioner to serve as an NBT. See 26 CFR 1.408-2(e).

    • An Archer MSA established under IRC 220

    • A health savings account established under IRC 223

    • An IRA established under IRC 408, IRC 408A or IRC 530

    • A plan established under IRC 401(a), IRC 403(b)(7), or IRC 457(b)

  2. To serve as an NBT, an entity must demonstrate in writing, to the Commissioner’s satisfaction, that the requirements of 26 CFR 1.408-2(e)(2) through 26 CFR 1.408-2(e)(6)(v) will be met. See 26 CFR 1.408-2(e)(1).

  3. If the requirements are met, the entity receives a written NOA that specifies the types of accounts the NBT will handle, the passive or non-passive status of the NBT, and the approval’s effective date. The NBT is not authorized to accept any fiduciary account before the NOA is effective. See 26 CFR 1.408-2(e)(7)(i).

  4. A NBT’s approval is contingent upon its continued satisfaction of the criteria under 26 CFR 1.408-2(e).

  5. The NBT must notify the Commissioner in writing via a "Notice of Change" (NOC) of any change that affects the continuing accuracy of the representations made in its application. See 26 CFR 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 NOA is revoked. See 26 CFR 1.408-2(e)(7)(iv).

  7. NBT applications are submitted under Rev. Proc. 2017-4 to:

    Internal Revenue Service
    Attention: EP Letter Rulings
    Stop 31
    P.O. Box 12192
    Covington, KY 41012-0192

Selection for Investigation

  1. EP R&A, EPCU (Employee Plans Compliance Unit), and EP Examinations employees involved with the NBT program have access to a database (Shared NBT Drive). The database is updated by assigned employees in those functions.

  2. The database:

    1. Contains information on each NBT and continually tracks approvals, withdrawals, suspensions, revocations, investigations, NOCs, and responses to NOCs ("acknowledgment letters" ).

    2. Is used to produce the periodically published list of approved NBTs ("The Approved List" ).

    .

  3. To gain access to the database, send an email request to be added as a "member" to the NBT Shared Drive Owner. See contact information in IRM 4.72.18.1.5, Contact Information for Business Units.

  4. Access the Shared NBT Drive.

  5. The database file includes:

    1. Prior NBT applications.

    2. NOAs (NBTs will generally only receive one).

      Note:

      Agents: Include a copy of the NOA in the case file.

    3. Prior NBTI files.

      Note:

      Agents: Review the most recent closing letter, include a copy in the case file, and if the closing letter advised the NBT to take corrective action, verify such action was taken within the specified time frame. If corrective action was not taken, revocation may be warranted. See IRM 4.72.18.7, Case Closing Steps – Proposed Revocation.

    4. Acknowledgment letters.

      Note:

      One of the most common changes acknowledged by the Commissioner is an address change. If the acknowledgment letter is recent, include the letter in the case file.

      Caution:

      An "acknowledgment letter" is not a new or revised NOA; it’s simply an acknowledgment of a change in the information submitted to EP R&A.

  6. Each fiscal year, Classification & Case Assignment selects a minimum of four NBTs from "The Approved List" for each Area to investigate for continued compliance with the NBT regulations (additional NBTs for may be selected for investigation based on operating priorities and available resources.)

    1. The goal is to conduct 20 NBT investigations each fiscal year, and to investigate each NBT at least once every five years.

    2. The actual number of NBTs investigated depends on the number of NBTs that EP Examinations has investigated in the prior five years.

    3. There may be years when there are fewer than 20 NBTs on the list to investigate.

  7. If the IRS receives information that a specific NBT may not be in compliance with the NBT regulations, a request or recommendation to investigate the NBT is made to Classification & Case Assignment.

Establishing the NBT Investigation Case

  1. Classification & Case Assignment establishes the NBT investigation 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

      Note:

      The statute date may be updated to alpha code "EE" when agent and manager determine warranted ((NMF cases don’t need an aging reason code to prevent alpha code "EE" from falling off of AIMS). Document the reason for the update and managerial concurrence in the CCR. See IRM 4.71.9, Employee Plans Examination of Returns, Statute Control Procedures, for additional information.

  2. Classification & Case Assignment includes these IDRS research documents in the case file:

    1. INOLES/T - to verify entity information

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

    3. PMFOLS - to identify entity-issued information return filings (i.e., Form 1099-R or Form 5498)

      Note:

      If specific data for Forms 1099-R or 5498 is needed, request an IRPTR(R) print.

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

  3. Classification & Case Assignment will gather the electronic information on the Shared Drive that contains all of the NBT’s historical information for each of the NBTs selected for investigation. See IRM 4.72.18.3.1 (1).

  4. Classification & Case Assignment will forward the following to the Area Manager of the EP Examinations group that will perform the NBT investigation:

    • The NBT electronic folder which contains the NBT application and other relevant documents.

    • The name and contact information of the NBT specialist in EP R&A Technical and the EP Specialized Plans K-Net who can collaborate with and respond to questions about the investigation.

    • Any other pertinent information.

    Note:

    The EP R&A and Specialized Plan K-Net contacts are assigned by the Manager, EP R&A Technical Group 1 and the EP Specialized Plans K-Net.

  5. The EP Examinations group manager will assign the NBT investigation to an EP Examinations agent.

  6. The agent will:

    1. Submit technical questions using Ask A Question or the Discussion Forum in the Specialized Plans K-Net

    2. Contact an EP R&A NBT specialist at any time with questions about the NBT regulations and any other problems encountered during the investigation. EP R&A may ask that the question be submitted to the Specialized Plans K-Net.

Full Investigation Determination

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

    IF AND THEN
    An entity acts as an NBT but was never approved to serve as an NBT or its NOA was revoked  
    • Do not start the investigation.

    • Consult with EP R&A technical to determine how to proceed and close the case.

    Note:

    Case disposal and the supporting rationale, as determined by EP R&A technical, must be included in the Transmittal Sheet. See case closing procedures for information on the preparation of the Transmittal Sheet.

    An approved NBT indicates that it is no longer serving as an NBT It wants to withdraw its NBT application, and remove its name from the list of approved NBTs,
    • Obtain a written statement (enclose this in the NBT investigation case file) from the NBT contact that:

      1. The accounts were transferred to another entity. If a transfer occurred, 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 NOA in the future, it must submit an application and user fee.

    • Close the case following the procedures in IRM 4.72.18.6, Case Closing Steps – Withdrawal of Notice of Approval Letter.

    .
    The approved NBT is out of business A contact person who has the authority to speak for the defunct NBT is available (e.g., an NBT ceases to exist because it merged into another entity and the surviving entity has the authority to speak for the defunct NBT; or the NBT is still in the process of winding down its operations)
    • Obtain a written statement (enclose this in the NBT investigation case file) from the NBT contact 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 and telephone; the date of the transfer; and the name of the person to contact at the transferee entity.

      2. Requests the withdrawal of the defunct NBT’s NOA 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 4.72.18.6, Case Closing Steps – Withdrawal of Notice of Approval Letter.

    The approved NBT is out of business and no contact person is available  
    • Notate in the report and Transmittal Sheet the fact that the NBT is out of business and that there is no contact person. Forward the case to EP R&A to commence revocation.

    • Close the case per IRM 4.72.18.6, Case Closing Steps – Withdrawal of Notice of Approval Letter.

    The approved NBT is not currently serving as an NBT It wants to retain its NOA for future use. Conduct the investigation because the NBT must continue to meet the requirements of the regulations. See IRM 4.72.18.4.2, Prepare for the NBT Investigation.
    None of the above applies   Conduct the NBT investigation. See IRM 4.72.18.4.2, Prepare for the NBT Investigation.

Prepare for the NBT Investigation

  1. Prepare for the NBT investigation by following these steps:

      (a)   Review the NBT application file and IDRS research.
      (b)   Determine the examination location with your group manager.
      (c)   Prepare and send the appointment letter to the NBT's contact person of record. See Exhibit 4.72.18-1.
        Include an Information Document Request (IDR). See Exhibit 4.72.18-2.
        And a Disclosure Statement. See Exhibit 4.72.18-3.
        If the NBT fails to respond within 14 calendar days from the date of the letter, the agent will call the NBT to discuss the contents of the letter (the investigation process, the documents requested, and to confirm/set the initial appointment or due date for documents). The agent’s call should take place after the 14th day but no later than 21st calendar days after the letter is mailed.
      (d)   Prepare interview questions. See Exhibit 4.72.18-4. DO NOT SEND THE INTERVIEW QUESTIONS TO THE NBT. Schedule a phone interview if the examination is conducted though correspondence.
  2. Request that the NBT provide the following information or documents to demonstrate its continued compliance with the NBT regulations:

    Information or Documents to Request Investigation Action
    A list of owners (including individuals and entities) with their percentage ownership and affiliated status under IRC 1563 Use to determine if the NBT continues to meet the continuity requirement of 26 CFR 1.408-2(e)(2)(i). See IRM 4.72.18.4.3 (2), Verify Compliance with the NBT Requirements.
    The Corporate Charter, Bylaws, Operating Agreement, Articles of Incorporation, and/or a document establishing the formation of the NBT Review these documents to verify:
    • The state and date of the NBTs incorporation or formation.

    • The state that has jurisdiction over the NBT.

    Note:

    Do not request this information if it is current and is included in the application case file retrieved from the electronic records in the Shared NBT Drive.

    By-laws, operating procedures or some other document that controls the NBT’s activities containing the rules of fiduciary conduct found at 26 CFR 1.408-2(e)(5). See paragraph IRM 4.72.18.4.3 (3), Verify Compliance with the NBT Requirements Review these documents to verify that the NBT does, in fact, have the document required by 26 CFR 1.408-2(e)(5).
    A copy of the organization chart This is relevant to several NBT requirements including continuity and fiduciary experience
    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

    Note:

    See IRM 4.72.18.4.3 (9), Verify Compliance with the NBT Requirements, and 26 CFR 1.408-2(e)(5)(i)(B).

    Use 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 verify:
    • A bond exists

    • The NBT is the named (or one of the named) insured

    • The bond is current and in force.

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

    A copy of the valuation report of the assets in the fiduciary accounts as of the most recent valuation date.

    Note:

    See IRM 4.72.18.4.3 (13), Verify Compliance with the NBT Requirements, and 26 CFR 1.408-2(e)(5)(ii)(E).

    Use the value of the assets in the fiduciary accounts for determining whether the NBT satisfies minimum net worth requirements.

    Note:

    See IRM 4.72.18.4.3 (14), Verify Compliance with the NBT Requirements, and 26 CFR 1.408-2(e)(5)(ii).

    A copy of the most recent Auditor’s Report of the audits and examinations of the NBT’s fiduciary books and records. See IRM 4.72.18.4.3 (15), Verify Compliance with the NBT Requirements, and 26 CFR 1.408-2(e)(5)(iii)(C). Review the Auditor’s Report to verify:
    • The NBT is actually causing the audit that 26 CFR 1.408(e)(5)(iii)(A) or (B) requires

    • Whether the fiduciary accounts have been administered in accordance with the [tax] law, the NBT’s rules of fiduciary conduct ( 26 CFR 1.408-2(e)(5)) and sound fiduciary principles

    Copies of Investment Committee and Board of Directors Minutes. Review the Investment Committee and Board of Directors minutes to help verify:
    • Whether the fiduciary accounts have been administered in accordance with the tax law, the NBT’s rules of fiduciary conduct 26 CFR 1.408-2(e)(5)) and sound fiduciary principles.


    Request this information only if other aspects of the NBT have been reviewed and additional information is required to conclude the NBT is compliant.
    Random copies of reports required by 26 CFR 1.408-5, 26 CFR 1.408-6, and 26 CFR 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.

    Note:

    See 26 CFR 1.408-2(e)(4)(ii)(C).

    Review these documents to verify that the NBT’s name is on the reports and that the NBT is fulfilling its fiduciary responsibilities.
    A copy of the most recent taxable year’s financial statement with auditor’s comment Use to identify the NBT’s net worth for purposes of determining whether it satisfies minimum net worth requirements. See IRM 4.72.18.4.3 (14), Verify Compliance with the NBT Requirements.
    A copy of the most recent aging report of accounts payable

    Note:

    See 26 CFR 1.408-2(e)(2)(v).

    Review this report for insight to the NBT’s financial responsibility and liquidity. 26 CFR 1.408-2(e)(2)(v), in part, asks the NBT to exhibit its ability to pay its debts [that are not under a legal dispute] as they become due. Review the NBT’s financial statements.

    Note:

    The requirement helps ensure that the NBT is financially responsible and has sufficient liquid assets.

    Employee personnel folders of the employees specified in IRM 4.72.18.4.2 (3)

    Note:

    See 26 CFR 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. Ask for separate meetings (one immediately after the other) at the on-site meeting with:

    1. The head of the trust department and the supervisors/managers of the trust employees to better understand the internal controls and the systems used for accounting for the fiduciary account assets.

    2. A few (not more than seven) randomly selected employees who handle the fiduciary accounts to verify that the controls are working and to learn about their experiences handling fiduciary accounts.

    3. The meetings shouldn’t take longer than two hours.

Verify Compliance with the NBT Requirements

  1. Interview the approved NBT to verify continued compliance with the below listed NBT requirements. See IRM 4.72.18.4.5, Post Interview, to link to the Checksheet/Workpaper that must be used to document the NBT investigation.

    NBT Requirement: Explanation
    Continuity The NBT must meet the continuity requirement. See IRM 4.72.18.4.3 (2)Continuity
    Established Location
    • The NBT must maintain an established business location that is accessible during normal business hours and report the address of that business location. See 26 CFR 1.408-2(e)(2)(ii).

    Fiduciary Experience or Expertise
    • A significant part of the NBT’s business must consist of administering fiduciary accounts.

    • Determine if the NBT continues to hire employees experienced in administering fiduciary accounts. See 26 CFR 1.408-2(e)(2)(iii).

      Note:

      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 used to handle retirement accounts.

    Financial Responsibility
    • The NBT must pay its debts as they become due (e.g., within 30 days of falling due unless they are the subject of a legal dispute.

      Note:

      See IRM 4.72.18.4.2 (2), Prepare for the NBT Investigation, and 26 CFR 1.408-2(e)(2)(v).

    Capacity to Account
    • Verify the NBT’s competence in accounting for the interests of a large number of individuals including calculating and allocating income earned and paying out distributions to payees. See 26 CFR 1.408-2(e)(3).

    Fitness to Handle Funds
    • Verify the NBT’s competence in performing activities normally associated with the handling retirement funds. See 26 CFR 1.408-2(e)(4), (especially those activities described in (ii)(A)-D).

    Rules of Fiduciary Conduct
    • See IRM 4.72.18.4.3 (3), Rules of Fiduciary Conduct.

    Copy of its NOA to its Customers
    • The NBT must furnish the plan administrator or the person for whose benefit the account is to be established a paper or electronic copy of the NBT’s NOA. 26 CFR 1.408-2(e)(7)(iii).

    Notices of Change The NBT must notify the Commissioner in writing of any changes that affect the continuing accuracy of representations made in its application. 26 CFR 1.408-2(e)(6)(iv).
    Trust and Custodial Agreements The written agreement between the NBT and a customer must indicate whether the NBT is passive or non-passive (see 26 CFR 1.408-2(e)(6)(i)) and state that it will substitute another trustee in the event the NBT fails to comply with NBT requirements.
  2. Continuity. The NBT must assure the uninterrupted performance of its fiduciary duties notwithstanding the death or change of its owners. The regulations at 26 CFR 1.408-2(e)(i)(B) and (C) provide safe harbors (diversity of ownership) for meeting the continuity requirement. EP R&A has also approved NBT applications based on a "facts and circumstances" analysis. See 26 CFR 1.408-2(e)(6)(iv). The facts and circumstances considered 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 does the applicant’s continuing existence, organization, viability, etc., depend on 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 the owner(s)’ death or disability.)

    Overall financial condition Consider the NBT’s audited financial statements and notes thereto. Focus on net worth, liquidity of assets, encumbrance of assets, receivables, subordinated debt, and subscribed stock.
    Substantial business operation
    • How many employees does the applicant have?

    • How many physical business locations does the applicant have?

      Note:

      A large business establishment with geographically diverse locations (similar to the companies that satisfy the safe harbors in 26 CFR 1.408-2(e)(2)(i)(B)(2) and (3)) is less likely to go out of existence solely because of the death or incapacity of one person.

    Regulatory supervision
    • There may be state or local regulatory supervision to take into account. For a broker-dealer, this is evidenced by membership in the Financial Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC).

      Note:

      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.

    Number of years of operation The longer the NBT has been in existence the more stable it may be.
    Miscellaneous
    • This category considers factors unique to a particular applicant that does not fit into any of the six preceding categories. These factors could be those 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 depends on the "facts and circumstances of the case."

    IF AND THEN
    The NBT under investigation falls outside of the safe harbors.   Determine whether the NBT met the facts and circumstances test when EP R&A approved the application (from the closed NBT application case file) and whether the approved facts and circumstances have changed since the NOA was issued. If EP R&A acknowledged a NOC that was based on the changes to facts and circumstances, contact EP R&A to discuss whether such changes may adversely affect compliance with the continuity requirement of 26 CFR 1.408-2(e)(6)(iv).
  3. Rules of Fiduciary Conduct. The NBT must demonstrate that it meets the provisions of the rules of fiduciary conduct listed in 26 CFR 1.408-2(e)(5)(i) through (viii) via:

    • Applicable regulatory requirements

    • Corporate or other governing instruments

    • Its established operating procedures

  4. In an investigation, the NBT must demonstrate compliance with the rules of fiduciary conduct in both form and operation.

  5. The NBT must demonstrate compliance in form by:

    1. Providing a copy of the document containing the rules of fiduciary conduct and a copy of the document formally adopting the rules such as a board resolution. The resolution must be executed and may not incorporate rules of fiduciary conduct by reference.

    2. Providing the applicable statutory requirements either under state or federal law, which mirror the rules of fiduciary conduct.

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

    1. Determining the NBT’s fiduciary policies

    2. Investing and disposing property held by the NBT in a fiduciary capacity

    3. Directing and reviewing that the actions of all employees (hire-fire relationship) the NBT uses in exercising its fiduciary powers. See 26 CFR 1.408-2(e)(5)(i)(A)(1).

      Note:

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

  7. Verify that the NBT, in operation, made a written record of accepting, relinquishing or closing out all fiduciary accounts, and the assets held for each account. 26 CFR 1.408-2(e)(5)(i)(A)(2).

  8. Verify that in operation, if the NBT (or a member of a controlled group of corporations or affiliated group (per IRC 1563(a) or 1563(e) and (f)(2) to which the NBT belongs) has the authority or the responsibility to render any investment advice for the assets held in or for each fiduciary account, it determines if it is advisable to retain or dispose of the assets at least once every 12 months. See 26 CFR 1.408-2(e)(5)(i)(A)(3).

  9. Obtain a copy of the bond or insurance policy, per 26 CFR 1.408-2(e)(5)(i)(B), in which the NBT is the named insured, is properly endorsed by the insurer, and includes all conditions, limitations, addendum, and riders. Include it in the Investigation case file and verify in operation that both:

    1. All employees of the NBT or other entity that take 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.

    2. The insurer’s bond or insurance policy liability limit is at least $250,000 after the applicable deductible.

  10. 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. See 26 CFR 1.408-2(e)(5)(i)(C).

  11. If the NBT (or a member of a controlled group of corporations per IRC 1563(a) or affiliated group per IRC 1563(e) and (f)(2) to which the NBT belongs), has the authority or the responsibility to render investment advice for 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 use the employees and facilities of the NBT’s other divisions and the NBT’s other divisions may use the employees and facilities of the trust or custodial division, as long as the separate identity of the trust or custodial division is preserved. See 26 CFR 1.408-2(e)(5)(i)(D).

  12. Verify that the NBT’s net worth (as defined in 26 CFR 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 does not need to demonstrate that it satisfies the net worth requirements in 26 CFR 1.408-2(e)(5)(ii) or this section if it demonstrates instead that it possesses taxing authority under applicable law. 26 CFR 1.408-2(e)(8)(i).

    Note:

    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. 26 CFR 1.408-2(e)(8)(ii).

  13. Verify that the NBT determines the value of the assets held by it in fiduciary accounts at least once each calendar year and no more than 18 months after the preceding valuation. The assets must be valued at their fair market value, except that for employee pension benefit plans to which section 103(b)(3)(A) of the ERISA (29 USC 1023(b)(3)(A)) applies, assets are considered to have the value stated in the plan’s most recent annual report. 26 CFR 1.408-2(e)(5)(ii)(E).

    1. The value of all assets the NBT holds 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 NBT’s fiduciary accounts value is accurate.

    2. The NBT cannot 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 would become indeterminable. In addition, Forms 1099-R and 5498 will be under or over stated and could result the account holder’s over-or-underpayment of tax. Therefore, the NBT must value all assets in its fiduciary accounts. For those assets where the value is not readily determinable, the NBT must develop a method for valuing these 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, close the case recommending revocation per the closing procedures in IRM 4.72.18.5, Case Closing Steps – Proposed Revocation, because the adequacy of the NBT’s net worth cannot be determined.

  14. The assets held in fiduciary accounts are not counted in determining net worth as they also represent liabilities. 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:
    1. $100,000, or

    2. The sum of —

    1. 2% of the value (determined as of the most recent valuation date) of all of the assets it holds passively in fiduciary accounts.

      1. An NBT is passive with respect to fiduciary accounts if neither it nor any member of a controlled group of corporations or affiliated group (per IRC 1563(a)(e) and (f)(2)) to which the NBT belongs renders investment advice, makes investment decisions, or directly or indirectly controls the fiduciary accounts’ investment activity.

      2. An NBT is not passive with respect to fiduciary accounts that are maintained in a common investment fund (per 26 CFR 1.408-2(e)(5)(viii)(C) according to 26 CFR 1.408-2(e)(5)(vi)).

    2. 4% of the value (determined as of the most recent valuation date) of all of the assets it holds in fiduciary accounts non-passively.

      1. An NBT is non-passive with respect to fiduciary accounts if it (or a member of a controlled group of corporations or affiliated group (per IRC 1563(a) (e) and (f)(2) to which the NBT belongs) renders investment advice, makes investment decisions, or directly or indirectly controls the fiduciary accounts’ investment activity.

    Minimum Net Worth at the end of the NBT’s most recent taxable year must exceed the greater of:
    1. $100,000, or

    2. (value of passive accounts x 2%) + (value of non-passive accounts x 4%).

    (26 CFR 1.408--2(e)(5)(ii)(B)).
    Members of the Securities Investor Protection Corporation (SIPC) may use the special rule in 26 CFR 1.408-2(e)(5)(ii)(D) to reduce the calculation in (b) above.
    To maintain its existing accounts during the current year, the NBT must take whatever lawful steps are necessary (including relinquishing fiduciary accounts) to ensure that its net worth (determined as of the close of each taxable year) exceeded: The greater of:
    1. $50,000, or

    2. the sum of —

    1. 1% of the value (determined as of the most recent valuation date) of all of the assets it holds in fiduciary accounts passively.

      1. An NBT is passive with respect to fiduciary accounts if neither it nor any member of a controlled group of corporations or affiliated group (per IRC 1563(a), (e) and (f)(2)) to which the NBT belongs renders investment advice, makes investment decisions, or directly or indirectly controls such fiduciary accounts’ investment activity.

      2. An NBT is not passive with respect to fiduciary accounts that are maintained in a common investment fund (per 26 CFR 1.408-2(e)(5)(viii)(C) according to 26 CFR 1.408-2(e)(5)(vi)).

    2. 2% of the value (determined as of the most recent valuation date) of all of the assets it holds in fiduciary accounts non-passively.

      1. The NBT is non-passive with respect to fiduciary accounts if it (or a member of a controlled group of corporations or affiliated group (per IRC 1563(a), (e) and (f)(2)) to which the NBT belongs) renders investment advice, makes investment decisions, or directly or indirectly controls the fiduciary accounts’ investment activity.

    Minimum Net Worth determined as of the close of each taxable year must exceed the greater of:
    1. $50,000 or

    2. (value of passive accounts X 1%) + (value of non-passive accounts X 2%).

    See 26 CFR 1.408-2(e)(5)(ii)(C).
    Members of SIPC may use the special rule provided at 26 CFR 1.408-2(e)(5)(ii)(D) to reduce the calculation in (b).
  15. Verify for the audit requirement in 26 CFR 1.408-2(e)(5)(iii), that:

    1. At least once during each 12-month period, the NBT obtains a detailed audit of its fiduciary books and records by a qualified public accountant.

    2. During the audit, the NBT determined whether the fiduciary accounts were administered: according to the law, the NBT’s rules of fiduciary conduct, and sound fiduciary principles.

    3. The audits were conducted according to generally accepted auditing standards and involve whatever tests the qualified public accountant thinks are needed of the fiduciary books and records.

    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 26 CFR 1.408-2(e)(5)(iii)(A) as long as the continuous audit system includes determining 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 according to generally accepted auditing standards and involve whatever tests of the NBT’s fiduciary books and records the auditor considers necessary.

  16. Verify that the report of the audits and examinations required by 26 CFR 1.408-2(e)(5)(iii) and the actions taken thereon them are noted in the NBT’s fiduciary records.

  17. 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. 26 CFR 1.408-2(e)(5)(iv).

  18. Verify that except for investments pooled in a common investment fund (per 26 CFR 1.408-2(e)(5)(viii)(C) according to 26 CFR 1.408-2(e)(5)(vi)) and for investments in accounts established under IRC 408(q), the investments of each account are not commingled with any other property. 26 CFR 1.408-2(e)(5)(v)(A).

  19. Verify that the assets of accounts requiring safekeeping are deposited in an adequate vault and the NBT keeps a permanent record of assets deposited in or withdrawn from the vault. (26 CFR 1.408-2(e)(5)(v)(B).

  20. If the NBT maintains a common investment fund (per 26 CFR 1.408-2(e)(5)(viii)(C)), verify that:

    1. The NBT is authorized under applicable law to administer a common investment fund. See 26 CFR 1.408-2(e)(5)(vi).

    2. The pooling of the assets in a common investment fund does not violate the plan documents or applicable law. 26 CFR 1.408-2(e)(5)(vi).

    3. The common investment fund is administered according to 26 CFR 1.408-2(e)(5)(vi)(A) through (F). 26 CFR 1.408-2(e)(5)(vi).

    4. The NBT’s rules of fiduciary conduct contain the language for common investment funds and for non-passively administering the accounts that are pooled in the common investment fund.

  21. Verify that the NBT keeps its fiduciary records separate and distinct from other records and retains them for as long as their contents may become material in administering any internal revenue law. See 26 CFR 1.408-2(e)(5)(vii).

  22. Verify that the fiduciary records contain full information for each account. 26 CFR 1.408-2(e)(5)(vii)(A).

  23. Verify that the NBT keeps an adequate record of all pending litigation to which it is a party in connection with exercising its fiduciary powers. 26 CFR 1.408-2(e)(5)(vii)(B).

  24. Verify that the NBT has notified the Commissioner in writing of any changes that affect the continuing accuracy of representations made in its application. See 26 CFR 1.408-2(e)(6)(iv).

  25. Verify that the NBT’s trust and custodial agreements (a) name the NBT, (b) support the NBT’s designation as passive or non-passive, and (c) provide for the substitution of the trustee upon notification by the Commissioner that such substitution is required because the applicant has failed to comply with the requirements of the regulations. See 26 CFR 1.408-2(e)(6)(v).

  26. Where applicable, verify that the NBT timely corrected the deficiencies identified in a prior investigation.

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 application, ask the NBT to prepare a NOC per 26 CFR 1.408-2(e)(6)(iv), addressed to the IRS at the address in IRM 4.72.18.3 (7)

    Note:

    Include the NOC in the NBT investigation case file.

  2. The NOC 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 EIN. (The EIN is different from the EIN on the NBT’s application or the NBT’s NOA issued by EP R&A). However, a change in the EIN may signify that the NBT is no longer the same entity that was approved. Because the NOA is not transferable, the case may need to be forwarded to EP R&A for possible revocation.

    3. An address change

    4. A passive NBT’s acceptance of non-passive accounts

    5. Acceptance of types of accounts that are not described in the NOA

    6. An acquisition, merger, consolidation, or other type of reorganization affecting the NBT. Certain reorganizations may warrant revocation and an application by the surviving entity to serve as an NBT.

Post Interview

  1. After interviewing the NBT, complete the NBT Investigation Checksheet / Workpaper by detailing, documenting, and commenting on the findings gathered from the IDR and interview questions. The NBT Investigation Checksheet/Workpaper replaces Form 5772 and Form 5773.

  2. If needed, request and/or research for additional information to cross-reference information received from the NBT by using:

    • "yK1/Y-Works"

    • Information returns issued by the NBT using IRPTR(R) and RICS

    • Asset Locator data

    • Any other internet research

  3. Number information narratives and documents the NBT submitted which are not included in the Checksheet/Workpaper. Reference them to the Checksheet/Workpaper.

Case Closing Steps - No Change or No Change with Deficiencies

  1. Prepare a favorable closing letter using as a guide:

    • Exhibit 4.72.18-5 (for a No Change) or

    • Exhibit 4.72.18-6 (for a No Change with Deficiencies)

      Note:

      The difference between the two letters is that the No Change with Deficiencies closing letter contains the following two sentences: "However, certain minor deficiencies were noted. Enclosed is an explanation of the deficiencies and the corrective action." . If deficiencies were noted, prepare the List of Deficiencies attachment.

  2. All favorable closing letters must include:

    1. "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 [insert all the account types authorized in the NOA]. In the Notice of Approval, you were advised that 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)."

    2. "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 Treas. Reg. 1.408-2(e) of the Income Tax Regulations."

    3. A statement indicating the investigation is not an examination under IRC 7605(b).

    4. The name and telephone number of the agent to contact.

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

  3. Save the favorable closing letter in the RCCMS Office Documents folder.

    Note:

    The designated prefix for NBTI documents and workpapers is 3K8.NONBANK TRUSTEE. The designated prefixes for other items (closing letters, correspondence, forms, case chronology record (CCR), IDRS, etc.) must conform to the RCCMS Naming Convention found at in 4.71.1 Exhibit 2 at IRM 4.71 - Employee Plans Examination Exhibits

    Note:

    Mandatory Review issues all favorable closing letters.

    Note:

    If a NOC was received during the investigation, it should be mentioned in the List of Deficiencies.

    Note:

    The Nonbank Trustee Transmittal Sheet Nonbank Trustee Transmittal Sheet is located under the "JOBS" tab on the "Examination" link under Nonbank Trustees and Custodians.

  4. Prepare an envelope addressed to the NBT with your return address (MR will use it to mail the NBT their closing letter).

  5. Prepare Form 5599 and use MFT 99, Disposal Code (DC) 02 or 08, and enter issue code 36z in box 701 (check box on lower right-hand corner of page 1 that items are on Page 2).

  6. Update RCCMS to reflect the correct DC and issue code (36z).

    • 02 (RCCMS code 107), No Change. Use when there are no issues found.

    • 08 (RCCMS code 206), Correction of Operational Practice-Future Impact. Use when there are minor deficiencies noted.

  7. Print out all case file information and assemble in the following order (top to bottom):

    1. Outside-front: Staple Form 10329 and the Nonbank Trustee Transmittal Sheet, see Exhibit 4.72.18-7 to the outside-front of each case file.

    2. Inside-right: Assemble on the inside-right of the paper case file:

      1. Closing letter

      2. Checksheet/workpapers/interview notes

      3. Form 2848

      4. CCR

      5. Investigation correspondence between the IRS and the NBT, in chronological order (most recent on top)

      6. All documents secured during the investigation, such as financial statements, auditors’ reports, net worth computations, fidelity bond, etc.

      7. NBT application file and relevant documents obtained from the Shared NBT Drive

      8. IDRS research

      Note:

      Leave Form 5599 loose in the case file

  8. Update the case to status 20, Review, on RCCMS and AIMS and transfer the RCCMS case to Mandatory Review.

  9. Call the Manager, EP Mandatory Review to obtain the mailing address for the paper case file.

Case Closing Steps – Withdrawal of Notice of Approval Letter

  1. If it is determined that the NBT is no longer acting in the capacity of an NBT, secure a letter from the NBT explicitly stating this fact and request that the NBT send the letter to EP R&A. Notify EP R&A of the withdrawal request so the NBT can be removed from the list of approved NBTs.

  2. Additionally, send a copy of the letter from the NBT to EP R&A, along with a Transmittal Sheet, correspondence received from the NBT, and any other relevant documents, toEP R&A Technical Group 1 at the address in IRM 4.72.18.1.5.

  3. Prepare a Form 5599 using MFT 99, DC 01, Regulatory/Revenue Protection, and enter issue code 36z in box 701 (check box on lower right-hand corner of page 1 that items are on Page 2).

  4. Update RCCMS for closing by entering DC 210, Regulatory/Revenue Protection and issue code 36z.

  5. Print out all case file information

  6. Do not send these cases to Mandatory Review. Close them directly to Closing Unit by:

    1. E-faxing a completed Form 5599 to 855-781-1193. This notifies them that the case is ready for RCCMS/NMF AIMS closure.

    2. Print the case file and ship it to the attention of EPCU Group Manager for scanning and uploading to the NBT shared drive. For the mailing address see IRM 4.72.18.1.5, Contact Information for Business Units.

Case Closing Steps – Proposed Revocation

  1. After completing the investigation, if it is determined the NBT’s NOA letter should be revoked, prepare the Nonbank Trustee Transmittal Sheet (see Exhibit 4.72.18-7) addressed to the Director, EP. Ensure the Transmittal Sheet includes the following:

    1. The NBT’s name.

    2. A statement that the NBT was investigated in accordance with IRM 4.72.18.

    3. A recommendation that the NOA be revoked

    4. A detailed rationale for the reason(s) why revocation is being recommended.

    5. The group manager’s signature.

    Note:

    The Nonbank Trustee Transmittal Sheet is located under the "JOBS" tab on the "Examination" link under Nonbank Trustees and Custodians.

  2. Print out the entire case file and assemble the file (top to bottom) as follows:

    1. Outside-front: Staple Form 10329 and the Nonbank Trustee Transmittal Sheet, to the outside-front of each case file.

    2. Inside-right: Assemble the following items on the inside-right of the paper case file:

      1. Checksheet/workpapers/interview notes

      2. Form 2848

      3. CCR

      4. Investigation correspondence between the IRS and the NBT, in chronological order (most recent on top)

      5. All documents secured during the investigation, such as financial statements, auditors’ reports, net worth computations, fidelity bond, etc.

      6. NBT application file

      7. IDRS research

  3. Compete Form 5599 using DC 09, Revocation (proposed) and enter issue code 36z in box 701 (check box on lower right-hand corner of page 1 that items are on Page 2).

  4. Update the case in RCCMS/NMF AMDISA to Status 38, Suspense, All Other, use DC 211 and Issue Code 36z in RCCMS.

    Caution:

    Do not close the case; the RCCMS case remains in the agent’s inventory until a determination is made by EP R&A.

  5. Mail the entire case file to EP R&A Technical Group 1 at the address in IRM 4.72.18.1.5.

  6. EP R&A will:

    1. Review the case file.

    2. Request any required additional information from the NBT.

    3. If revocation is warranted, EP R&A will follow the procedures in 26 CFR 1.408-2(e)(7)(v) for revoking the NOA. It will also send a secure email containing the NBT disposition memo and a copy of the closing letter to the agent, the agent's group manager, and EPCU, informing them that the case can be closed from RCCMS and NMF AIMS once the agent reviews the file. EP R&A mails the revocation letter to the entity.

    4. If EP R&A finds that revocation is not warranted, it will provide a memo and a copy of the closing letter as provided in (c) above.

  7. Agent: The agent will check with EP R&A on a monthly basis regarding the status of the case.

  8. Agent: If EP R&A supported revocation,

    1. Save the closing letter and the NBT Disposition Memo in the RCCMS Office Documents folder using the RCCMS Naming Convention found in 4.71.1 Exhibit 2 at IRM 4.71 - Employee Plans Examination Exhibits

      Note:

      The designated prefix for NBTI documents and workpapers is 3K8.NONBANK TRUSTEE. The designated prefixes for other items (correspondence, forms, CCR, IDRS, etc.) should conform to the RCCMS Naming Convention.

    2. E-fax a completed Form 5599 to Closing Unit at 855-781-1193 to notify them the case is ready to close in RCCMS/NMF AIMS.

    3. Send the closed investigation case file to the attention of the EPCU Group Manager for scanning and uploading to the NBT shared drive. For the mailing address see IRM 4.72.18.1.5, Contact Information for Business Units.

    Note:

    EP R&A is the ultimate authority on all NBTIs. Since EP R&A reviewed the investigation, do not send the case to Mandatory Review.

Case Closing Steps – Survey Before or After Assignment

  1. If the agent is assigned a case for investigation and the agent and group manager determine that the case should not be investigated since there has been recent compliance activity involving the NBT, contact C&CA per IRM 4.72.18.1.5, and secure its concurrence to survey the case.

  2. If C&CA agrees that the case can be surveyed follow the procedures in IRM 4.71.7, Survey Returns.

  3. Classification & Case Assignment may assign another NBT for investigation to replace the one that was surveyed.

  4. Close the case using one of the following DCs:

    1. 31 (RCCMS code 910), Survey Before Assignment

    2. 32 (RCCMS code 908), Survey After Assignment

  5. Notify the EPCU manager that the case has been surveyed., See IRM 4.72.18.1.5, Contact Information for Business Units for EPCU contact information.

EPCU Scanning of Closed Investigation Files and Upload to NBT Shared Drive

  1. When NBT Investigation cases are closed, the groups send printed copies of the entire case file to EPCU.

  2. EPCU will:

    1. Scan the entire case into an electronic format.

    2. Upload the electronic case file to the Shared NBT Drive to a separate folder for that NBT that includes all its historical documents. The case file should be included in the sub-folder for the NBT entitled "EPCU."

    3. Enter the NBT investigation’s closing date on the NBT inventory tracking system.

Recertification

  1. Each year, October 1 through December 31, the EPCU contacts each approved NBT that was not selected for investigation during that year and certifies that the NBT wishes to retain its NOA letter.

  2. EPCU issues a letter on or about October 1 to all NBTs that were not selected for investigation during that year.

  3. The letter should request the NBT to:

    1. Verify it wants to retain its NOA

    2. Verify the NBT’s current address

    3. Identify the names of individuals and/or points of contact for the NBT to whom we can send future correspondence

  4. The following table provides actions the EPCU should take based on the NBT’s response to the letter.

    IF THEN
    If an NBT does not want to retain its NOA: It must state, in writing:
    • It is no longer serving as an NBT.

    • It wishes to withdraw its NBT application.

    • It wants to have its name removed from the list of approved NBTs.

    • Whether the accounts were transferred to another entity.

      Note:

      If transferred, the statement should include (if available) the transferee’s name, address, telephone, and person to contact.

    If EPCU does not receive a response from an NBT within 30 days, EPCU researches the internet and/or IDRS to determine a reason the NBT did not respond to the letter.
    1. If the research reveals a new address for the NBT, EPCU sends another letter to the new address.

    2. 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 letter, EPCU informs EP R&A. EP R&A will send a letter that:

      1. Notifies the NBT of the suspension and propose revocation of the NOA per 26 CFR 1.408-2(e)(7)(v).

      2. Is sent by registered or certified mail.

    If the NBT responds to the first letter within 30 days or the second letter within 60 days per 26 CFR 1.408-2(e)(7)(v)(C) and declares that it wishes to retain its NOA, EP R&A will retain the NBT’s name on the list of approved NBTs
    If the NBT does not respond within 60 days per 26 CFR 1.408-2(e)(7)(v)(C) or (D), The Director of EP R&A will revoke the NBT’s NOA and the name of the NBT will be removed from the list of approved NBTs.
    If an approved NBT does not certify that it wishes to retain its NOA or the approved NBT cannot be located. The Director of EP R&A will revoke the approved NBT’s NOA and its name will be removed from the list of approved NBTs.

NBT Status Changes - Coordination Between EP R&A and EPCU

  1. If the NBT indicates that they no longer operate as an NBT, the EPCU will:

    1. Secure a written statement from the NBT specifically stating this.

    2. Update the NBT database to reflect the change.

    3. Scan the EPCU case file, including the statement from the NBT, and upload these documents to the shared NBT drive.

    4. Send the letter from the NBT to EP R&A.

  2. EP R&A will:

    1. Remove the NBT from the published list.

    2. Send a letter to the NBT confirming that they are no longer operating as an NBT and that they are removed from the list of approved NBT’s.

  3. If the NBT indicates that there is a significant change to the NBT (e.g., NBT changed its organizational structure from corporation to partnership), the EPCU will:

    1. Secure written statement from the NBT specifically stating this.

    2. Update the NBT database to reflect the change.

    3. Scan the EPCU case file, including the statement from the NBT, and uploads these documents to the Shared NBT Drive.

    4. Send the letter from the NBT to EP R&A.

  4. EP R&A will:

    1. Update the published list and determine if any additional information or action is necessary.

    2. Send a letter to the NBT acknowledging the change

  5. If the NBT indicates that there are minor changes to the entity information (e.g., address change or change in the name of the point of contact), the EPCU will:

    1. Secure a written statement from the NBT specifically stating the nature of the change.

    2. Update the NBT database to reflect the change.

    3. Scan the EPCU case file, including the statement from the NBT, and upload these documents to the shared NBT drive.

    4. Send the letter from the NBT to R&A.

  6. EP R&A will:

    1. Update the published list and determine if any additional information or actions are necessary.

    2. Send a letter to the NBT acknowledging the change.

  7. If EP R&A determines that any changes in IRM 4.72.18.10.1 (1), IRM 4.72.18.10.1 (3), IRM 4.72.18.10.1 (5) above are different than initially provided, it will :

    1. Update the NBT database to reflect the change.

    2. Scan the case file, including the statement from the NBT, and upload these documents to the shared NBT drive.

Abbreviated Compliance Checks

  1. Instead of a doing a complete NBT investigation, EP Examinations (coordinated by EPCU) may conduct a short check for compliance with the NBT regulations at 26 CFR 1.408-2(e). EPCU, through a compliance check, sends a short questionnaire to selected NBTs for the following key items in the regulations that they evaluate to determine if a full NBT investigation is needed:

    1. Continuity

    2. Capacity to Account

    3. Bonding

    4. Adequacy of Net Worth

    5. Court Action/Bankruptcy

    6. Passive or Non-Passive (Active)

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 Treas. Reg. 1.408-2(e)(2) through 1.408-2(e)(7)(iii). 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
 

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. A demonstration that the minimum net worth requirements as of the end of the most recent taxable year for purposes of Treas. Reg. 1.408-2(e)(5)(ii)(B) and (C) (as modified by (D)) are satisfied.
  a. Make sure the valuation date being used is specified in the calculation and ties to the supporting documentation.
  b. 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:
  a. The audit of your fiduciary books and records as required by Treas. Reg. 1.408-2(e)(5)(iii)(A) or (B).
  b. If applicable, a copy of your Sarbanes-Oxley compliance report.
8. Provide the report/records generated under Treas. Reg. 1.408-2(e)(5)(iii)(C) relating to the audit required by Treas. 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 Treas. 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 handling the fiduciary accounts, as specified in item (12) below.
12. Please arrange separate meetings (one immediately after the other) at the time of the on-site meeting, with:
  a. The head of the Trust Department and the supervisor/manager 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.
  b. A few (not more than seven (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.

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 statute 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.

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 owners’ names and ownership percentages?
       
       
    (ii) Do the 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 the field of handling fiduciary accounts?
   
4. What are their job responsibilities?
  • Who directs and monitors actions of employees?

  • Who maintains records for federal tax purposes?

  • Who prepares Forms 1099?

  • Who prepares Forms 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 types 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 itself a passive or non-passive NBT or both depending on the account?
    (Workpaper Part II A 4 C —Fitness to Handle Funds)
    □ Passive □ Non-passive
5. a. What other types of non-fiduciary 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))
    □ Yes □ No
     
  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 EP R&A 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 paper or electronic 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 experienced 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)
    □Yes □ No
  c. If "yes," does this supersede the certified audit requirement?
    □Yes □ No

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, pursuant to section 1.408-2(e) of the Income Tax Regulations (Regulations), authorizing [insert name of NBT] to act as a nonbank [insert "non-passive" and/or "passive" trustee status as authorized by the NOA and letters acknowledging an NOC] trustee or custodian of [select only those accounts in the following list that were authorized by the NOA as adjusted by any Acknowledgment Letters issued: Archer MSAs (medical savings accounts) established under section 220 of the Internal Revenue Code (Code), health savings accounts described in section 223, plans qualified under section 401, accounts described in section 403(b)(7), individual retirement accounts (IRAs) established under sections 408, Roth IRAs under section 408A, Coverdell education savings accounts established under section 530, and eligible deferred compensation plans described in section 457(b). ] In the Notice of Approval, you were advised that approval would be contingent upon the continued satisfaction of the criteria set forth in section 1.408-2(e) of the 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 trustees/custodians 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

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, pursuant to section 1.408-2(e) of the Income Tax Regulations (Regulations), authorizing [insert name of NBT] to act as a nonbank [insert "non-passive" and/or "passive" trustee status as authorized by the NOA and letters acknowledging an NOC] trustee or custodian of [select only those accounts in the following list that were authorized by the NOA as adjusted by any Acknowledgment Letters issued: Archer MSAs (medical savings accounts) established under section 220 of the Internal Revenue Code (Code), health savings accounts described in section 223, plans qualified under section 401, accounts described in section 403(b)(7), individual retirement accounts (IRAs) established under sections 408, Roth IRAs under section 408A, Coverdell ESAs (education savings accounts) established under section 530, and eligible deferred compensation plans described in section 457(b)]. In the Notice of Approval, you were advised that approval would be contingent upon the continued satisfaction of the criteria set forth in section 1.408-2(e) of the 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 trustees/custodians under section 1.408-2(e) of the Regulations. However, certain deficiencies were noted. Enclosed is an explanation of the deficiencies and the corrective action taken or to be taken within the time frame described.

This investigation was not an examination under IRC 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. Treas. Reg. 1.408-2(e)(5) provides that the [nonbank trustee] applicant must demonstrate that the rules of fiduciary conduct specified in Treas. Reg. 1.408-2(e)(5)(i) through (viii) 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 1.408-2(e)(5)(i) through 1.408-2(e)(5)(viii)(F) exists. The absence of this document is a violation of section 1.408-2(e)(5). Therefore, please see to it that the rules of fiduciary conduct and an adoption resolution are prepared and executed within 90 days from the date of this closing letter.

2. Section 1.408-2(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 the bond covers all of the employees involved in fiduciary activities. Therefore, the requirements of 1.408-2(e)(5)(i)(B) are not currently satisfied. Accordingly, you must obtain a bond that satisfies the requirements of the regulations in order to preserve your Notice of Approval. The bond must be obtained within 90 days from the date of this closing letter.

You stated that (insert name of NBT) participated in a merger, which resulted in a name and address change.

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].

Within 90 days from the date of this letter, notify the Commissioner in writing of the change and send the notification to the following address:

Internal Revenue Service
c/o Manager SE:T:EP:RA:T1
1111 Constitution Avenue, NW - NCA
Washington, DC 20224

3. 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. In order to comply with this requirement and correct this deficiency, you must provide a copy (paper or electronic) of the NOA to all current and future account holders. Please provide such a copy to current account holders within 90 days from the date of this letter, and ensure that procedures for new accounts are changed to include providing a copy of the NOA.

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

Note:

The "List of Deficiencies" is only a sample. The actual deficiencies found during the investigation should be noted. If the deficiencies were corrected during the investigation, the correction should be noted as well and a time frame for correction need not be imposed. If the deficiency is serious, such as the merger of the NBT into an entity that is not an approved NBT, revocation should be proposed. The surviving entity may apply for approval to become an NBT.

Note:

The following sentence can be used as an alternative to providing individual time frames for each deficiency noted. "The deficiencies described in paragraphs [insert the numbers of the paragraphs describing the deficiencies not corrected during the investigation] must be corrected within 90 days from the date of this letter."

Nonbank Trustee Transmittal Sheet

Nonbank Trustee Transmittal Sheet

Nonbank Trustee Transmittal Sheet

Complete this form at the conclusion of an investigation. It is used to provide a synopsis of the results of the investigation for purposes of transmitting the file to Headquarters.

Nonbank Trustee/Custodian 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 (EP Rulings & Agreements will prepare closing letter.)
□ Withdrawal (EP Rulings & Agreements will prepare closing letter.)

Rationale for the Conclusion
Briefly explain your conclusion, key findings or issues and the rationale (continuation sheet on page 2) Other Issues or Concerns
Briefly explain any issues or concerns that should be brought to the attention of EP Rulings & Agreements (continuation sheet on page 2)

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