Senate Probes High Profile Accountants' Roles In Tax Shelters

by Leroy Baker, Tax-News.com, New York

23 April 2003

The Senate permanent subcommittee on investigations has requested documents from high profile accounting firms Ernst & Young and KPMG relating to advice given by them with regard to tax shelters, according to a recent Wall Street Journal report.

The WSJ revealed that this forms part of a broader investigation into the promotion and use of abusive tax shelters by companies and individuals, with a particular focus on those who advertise and advocate such activities.

The Senate investigation follows closely in the wake of a recent campaign by the Internal Revenue Service (IRS), aimed at clamping down on tax shelters. KPMG was among firms targeted by the tax authority, and the IRS last year sued a number of accounting firms in order to obtain relevant documents

The Senate Subcommittee examination of tax shelters was authorised last year, although it is not expected to report results for some months, and has no legislative power of its own.

A spokesman for Ernst & Young said the firm was aware of the requests and that it is "cooperating." A KPMG spokesman declined to comment. Both firms deny that they have been involved in selling 'improper' shelters and say that all transactions they have enabled are legitimate.

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.

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