Problems Associated with Illegal Tax Shelters

KPMG Tax Shelters - This article discusses tax shelters that had been established and sold by the accounting firm KPMG. According to the Internal Revenue Service (I.R.S.), these tax shelters were illegal and had been created with the sole intent of helping "wealthy investors illegally hide billions of dollars in taxable income" (para. 5). Although KPMG first started creating these tax shelters in the late 1990's, it was not until 1999, after receiving anonymous phone calls with information about the tax shelters, that the I.R.S. suspected the firm of wrong doing.

In 2002, the I.R.S. proceeded to serve KPMG with several summonses requesting information about the firm's tax shelters and clients. The firm refused to produce this information. KPMG had profited greatly through the sale of these tax shelters, and had become one of the top firms selling this product. Sharing information about clients and the tax shelters would be bad for business.

For months KPMG continued to refuse to produce the documents. Finally, in July, 2002, the Justice Department "filed a civil lawsuit against the firm seeking to force it to comply with the I.R.S. summonses" (para 30).

A Senate subcommittee hearing into KPMG tax shelters was held in November, 2003. At this point, the evidence against KPMG was great. According to Senate investigators, the tax shelters set up and sold by KPMG caused the I.R.S. to lose at least $1.4 billion due to unpaid taxes. A few weeks after the hearing, the firm decided to cooperate with the I.R.S. This resulted in a settlement which calls for "the firm to pay $456 million and accept an outside monitor of its operations" (para. 5).

Legal Issues

The primary legal issue in this case is the creation and sale of tax shelters that help clients illegally hide taxable income. A secondary legal issue is the refusal to produce documents requested by the I.R.S. for use in the investigation.

Managerial Perspective

The problems faced by KPMG in this case could have easily been avoided. A thorough study of tax laws, prior to the creation of the tax shelters, would have revealed the questionable legality of the proposed shelters. KPMG made the problems worse by refusing to produce requested documents. Had the firm admitted the mistake of creating and selling these tax shelters, and agreed to a settlement sooner, money spent on legal fees could have been greatly reduced and the firm may have been able to save its reputation.

References:

"US: How an Accounting Firm Went From Resistance to Resignation." Browning, Lynnley. The New York Times. URL: http://www.corpwatch.org/article.php?id=12575