IRS Takes Action Against Two Top Accounting Firms

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

10 July 2002

Rumours that the IRS was about to target top accounting firms for their promotion of tax shelters were confirmed yesterday when the agency launched court actions against KPMG and BDO Seidman requiring the production of lists of clients to whom they have sold the shelters. Accounting firms and tax advisers are supposed to register tax shelters with the IRS and to maintain lists of the clients involved, which in the case of a large firm and a popular shelter may stretch to hundreds of names.

Both firms deny that they have been involved in selling 'improper' shelters and say that all transactions they have enabled are legitimate.

The IRS says that BDO Seidman (fifth-largest US accounting firm) has failed to register shelters and maintain lists. BDO Seidman says it is in dispute with the agency over how much information it is entitled to.

In the case of KPMG (fourth-largest US accounting firm), the IRS says that the firm is continuing to hide information 'as it continues to develop and aggressively market dozens of possibly abusive tax shelters'. KPMG also said it had disputes with the agency, but a spokesman said: "We are confident that this matter will be resolved satisfactorily."

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.

However, PricewaterhouseCoopers LLP (the largest US accounting firm) 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.

Second-largest firm Ernst & Young denies that it has marketed 'improper' shelters and says it has no reason to believe that it is included in the IRS's current crack-down. Said spokesman Leslie Zuke: 'Ernst & Young has been co-operating fully with the IRS and based on that co-operation sees no reason to think that the firm will be included in any IRS action'.

The problem for accounting firms and their clients is that what may seem a legitimate piece of tax avoidance to them may be unilaterally classified as 'improper' or 'abusive' by the IRS, and in retrospect the IRS can then claim that the transaction should have been registered (a voluntary process). The matter can only eventually be resolved in the Courts, but past IRS attempts to get the Courts to outlaw many types of tax shelter have often failed. This is why the IRS tries to resolve its difficulties with the accounting firms by negotiation, and its resort to legal action needs to be seen as just a part of ongoing negotiation with the firms in question.

Recommended