KPMG Must Reveal Tax-Shelter Clients

The firm maintained that it had told clients ''they were undertaking complex transactions on which the law was ambiguous and often had not been cla...
Stephen TaubMay 6, 2004

KPMG lost a major battle in its tax shelter controversy.

A federal judge has ruled that the Big Four accountancy must furnish the Internal Revenue Service with the names of participants in a number of shelters and must produce related documents, according to Reuters. The firm has 10 days to comply with nine IRS summonses, issued between January and May 2002, stemming from a widening tax shelter investigation, added the wire service.

In his legal opinion, Judge Thomas Hogan of the U.S. District Court for the District of Columbia rejected the firm’s claim that disclosing the investors’ identities to the IRS would violate confidentiality privileges between attorneys and their clients, according to the Associated Press. “KPMG appears to have withheld documents summoned by the IRS by incorrectly describing the documents to support dubious claims of privilege,” the judge reportedly wrote.

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Hogan cited evidence that a law firm hired by KPMG “was not engaged in rendering true legal advice, but was rather a partner with KPMG in its tax shelter marketing strategy,” reported Reuters.

If KPMG ultimately reveals those names, warned Dan Goldwasser, a partner with the law firm Vedder Price Kaufman & Kammholz, according to Reuters, “these clients are going to be attacked by the IRS and they’re going to turn around and go after KPMG.” Added Goldwasser: “What they’re going to sue KPMG for is not for revealing their names, but rather for giving them erroneous advice in the first place. That’s where the danger lies.”

In February, a federal grand jury in Manhattan launched a probe of the sale of tax shelters by KPMG to corporations and wealthy individuals who used them to escape at least $1.4 billion in federal taxes. From 1997 through 2001, KPMG collected $124 million in fees for tax shelters, according to a November estimate by minority staff of the Senate Permanent Investigations subcommittee, reported The New York Times.

At a subcommittee hearing in November, KPMG maintained that “it made it very clear to the clients that they were undertaking complex transactions on which the law was ambiguous and often had not been clarified by either the IRS or the courts,” Reuters reported.

Meanwhile, Ernst & Young, which was recently barred from accepting new auditing clients for six months, is under attack for its tax shelter business in the United Kingdom, according to the Financial Times.

More than 30 top U.K. companies used an E&Y corporate tax avoidance program that relied on currency swaps, reported the FT, which cited Whitehall officials.

Aidan O’Carroll, U.K. head of tax at Ernst & Young, told the paper that “I do not think we promote abusive schemes.”