“Does the government have to return to Madoff all the income tax he paid for his inflated nonexistent income?”
What non existent income did he have? quite the contrary, he never reported the money that he stole as income. He underreported income.
“Also, did the government return the tax overpaid by Madoff investors for their nonexistent income?”
There were specific rulings issued for how losses form the Madoff scam were to e reported for income tax purposes.
I do not recall what they were, but it was addressed.