IRS About To Target Major Accounting Firms On Tax Shelters

by Mike Godfrey, Tax-News.com, New York

09 July 2002

Rumours are surfacing that the Internal Revenue Service is about to gear up its crack down on so-called 'abusive' or 'improper' tax shelters by demanding access to the client lists maintained by one or more major accounting firms.

The attack on tax shelters has been a major policy preoccupation for the IRS this year. In January the agency mounted a 4-month Tax Shelter Disclosure Initiative, which resulted in 621 disclosures covering 947 tax returns, and involving more than $16 billion in claimed losses and deductions. The initiative was aimed at corporate taxpayers and wealthy individuals worried that tax shelters which they were using might be illegal, but afraid to come forward.

Senior Treasury tax policy official, Pamela F. Olson said in June that the Treasury has been overwhelmed dealing with the tax shelters disclosed during the amnesty and had not yet gotten around to reviewing the majority of the practices recommended by the 'Big Four' accounting firms.

More recently the IRS has been using individual summonses to target the users of tax shelters, but finds that this method is unwieldy, requiring a Court action each time. So now it is about to use its more general power, available once it has made the 'improper' determination to require an advisory firm to disclose the full list of clients involved in a particular shelter. Advisory firms have to register tax shelters with the IRS, and are required to maintain lists of all those clients who use a given shelter, lists which could number in the hundreds or even thousands in the case of a large firm.

Speculation is mounting about which firms are in the firing line. The largest advisory firm, PricewaterhouseCoopers LLP, reached a settlement with the IRS in June to resolve issues related to the registration of tax shelters and the maintenance of client lists. PricewaterhouseCoopers didn't admit to or deny wrongdoing but made what the IRS called "a substantial payment" relating to advice given to clients dating back to 1995.

A New York Times report, also in June, accused Ernst & Young of using 'morally indefensible' tax minimization techniques, but the accounting firm hit back angrily, stating that: 'Under no circumstance would Ernst & Young authorize advising a client to conceal income or evade taxes. We strongly resent the implication that we would do so.'

Kenneth Kerrigan, spokesman for Ernst & Young said that at least one of the techniques used by the firm's clients had been disclosed to the government and had not been challenged, and that none of the techniques had been classified by the authorities as 'improper tax shelters'.

Ernst & Young spokesman Leslie Zuke today insisted that the firm had been co-operating fully with the IRS and based on that co-operation saw no reason to suppose that it would be included in any upcoming action by the agency.

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