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September 15, 2008

Robert Sperling
(202) 622-6500

TIGTA Releases Audit on the Use of Qualified Intermediaries in Like-Kind Exchanges

The Treasury Inspector General for Tax Administration (TIGTA) today publicly released its review of the Internal Revenue Service's (IRS's) qualified intermediary regulations and qualification requirements.

Qualified intermediaries assist taxpayers in completing a like-kind exchange. Under normal circumstances, when a taxpayer sells business or investment property, tax must be paid on the gain at the time of the sale. Qualified intermediaries receive and hold the proceeds of a sold property and then disburse the funds to acquire a replacement property, thereby deferring payment of the capital gains tax, thus saving the taxpayer a tax obligation.

The overall objective of the audit was to evaluate the protections provided to taxpayers by laws and regulations addressing qualification requirements for qualified intermediaries. Specifically, examine transactions subject to like-kind exchange requirements, assess the qualification requirements for qualified intermediaries, and determine the legal protections available to taxpayers.

"In early 2008, IRS cautioned taxpayers about recent incidents of qualified intermediaries declaring bankruptcy or otherwise unable to meet their contractual obligations," said J. Russell George, Inspector General, Treasury Inspector General for Tax Administration. "As the number of like-kind exchanges more than doubled between Tax Years 2001 and 2005, we believe these defaults are further fall-out resulting from the dramatic shift in real estate prices."

TIGTA found that the IRS does not have authority over qualified intermediaries. Although qualified intermediaries have important fiduciary responsibilities, they are not licensed or regulated, have minimal Federal Government oversight, and are not subject to minimum standards for training, competency, or conduct. In addition, the absence of firm data on the extent of problem qualified intermediaries and the number of taxpayers affected precluded TIGTA from making a recommendation to involve the IRS in the oversight of qualified intermediaries. Such data would be needed to properly evaluate whether the benefit that might be derived from IRS oversight would outweigh the costs.

TIGTA recommended that the IRS enhance written guidance provided to taxpayers by including information about the risks associated with using a qualified intermediary and alternatives to qualified intermediaries.

"The IRS must ensure the clarity and effectiveness of written guidance for taxpayers, not only to meet their Federal tax obligations," continued George, "but to also understand the risks associated with certain financial services related to tax matters."

IRS officials agreed with TIGTA's recommendations.