Due Diligence on a QI: As the Financial Press Focuses on Bernard Madoff and Other Ponzi Schemes, Recent Investor Losses Approaching $1 Billion by the Failure of Qualified Intermediaries Have Gone Relatively Unnoticed. Qualified Intermediaries, or QIs, Facilitate Tax-Deferred Exchanges of Like-Kind Property under Section 1031 of the Internal Revenue Code
Deans, Donald M., Journal of Accountancy
Some QIs have made allegedly imprudent investments in recent years, while others have allegedly siphoned off funds to related parties and are facing criminal charges.
Investor/taxpayers in these cases often not only lose the proceeds from the sale of their exchanged (and not yet replaced) property, but the exchange is deemed to be invalid, triggering a taxable event. Thus, due diligence is necessary before selecting a QI. Here are some points to include in such an inquiry:
[check] Identify the type of entity in which the QI operates. Check records in the QI's state of incorporation to ensure that it is registered as a corporation in good standing. Any QI operating as an unincorporated entity could expose the transaction to legal problems resulting from personal liability or death of the QI.
[check] Obtain resumes of all owners and management personnel. If necessary, obtain civil and criminal background checks. Consider how long they have been in the industry. Determine if they are members of professional organizations such as the Federation of Exchange Accommodators and whether they are Certified Exchange Specialists.
[check] Determine the range of services the QI offers. Obtain the type, number and dollar volume of exchanges completed over the past three years. Look for a range of types of transactions, indicating breadth of experience.
[check] Obtain the QI's financial statements for the past three years. If the QI is a member of a larger entity, obtain consolidated financial statements.
[check] Obtain copies and explanations of the QI's bond agreements, error-and-omissions policy and any other insurance. Obtain the names of accountants, attorneys and professional advisers on staff or retainer as well as banking references. …