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E&Y Reaches Tax Shelter Deal With IRS

by Mike Godfrey,, Washington

05 March 2013

Accountancy firm Ernst & Young has agreed to pay the US Internal Revenue Service (IRS) USD123m after it admitted "wrongful conduct" in connection with its participation in four tax shelters.

Details of the case have been released by the Manhattan US Attorney, Preet Bharara. The allegations date to the 1999-2004 period, during which Ernst & Young clients are said to have used the shelters in an effort to defer, reduce, or eliminate tax liabilities of more than USD2bn. The firm's payment of USD123m will be made under the terms of a non-prosecution agreement (NPA) entered into with the US Government. Ernst & Young acknowledged a prepared "Statement of Facts", admitting the wrongful conduct of certain partners and employees.

According to the Statement of Facts, Ernst & Young, in conjunction with a number of firms, banks, and investment advisors, developed, marketed and implemented four tax shelter products between 1999 and 2002. These products were then utilized by approximately 200 high net worth clients. Ernst & Young "prepared tax returns reflecting tax losses it claimed to have been derived from these tax shelters," and subsequently defended individual clients in connection with IRS audits.

The Statement goes on to pin primary responsibility on a small group within Ernst & Young known as the Strategic Individual Solutions Group (SISG). Individual SISG personnel are accused of having directed other E&Y employees to participate in a "concerted effort not to create, disseminate, or publicize any documents which reflected either the tax motivation behind the strategies or the preplanned sequence of steps necessary to effect" them.

Members of the SISG are also alleged to have falsely portrayed the transactions under examination as purely investment-driven transactions, and of denying their tax motivation. Of the documents that were prepared by SISG employees, some were created to falsely and inaccurately reflect events or conversations. The aim in this, the Statement says, was to "improperly influence the IRS’s view of the merits of the transactions in the event of an audit."

Under the terms of its NPA, Ernst and Young has also agreed to certain permanent restrictions and controls on its tax practice. These include a prohibition against planning, promoting or recommending any "listed transaction" - namely a transaction that is the same as, or substantially similar to, one that the IRS has determined to be a tax avoidance transaction. Ernst & Young must continue to cooperate with the Government's investigation, and, in exchange, the firm will not be criminally prosecuted for its participation in the scheme. In the event of any violation of the NPA, the Attorney's Office may proceed with prosecution.

TAGS: individuals | compliance | Wealth | tax | investment | tax compliance | tax avoidance | tax incentives | employees | audit | Internal Revenue Service (IRS) | tax authority | tax planning

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