KPMG tax shelter fraud

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The KPMG tax shelter fraud scandal involves allegedly illegal U.S. tax shelters by KPMG that were exposed beginning in 2003. In early 2005, the United States member firm of KPMG International, KPMG LLP, was accused by the United States Department of Justice of fraud in marketing abusive tax shelters.

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[edit] Deferred Prosecution Agreement

Under an agreement, KPMG LLP admitted criminal wrongdoing in creating fraudulent tax shelters to help wealthy clients dodge $2.5 billion in taxes and agreed to pay $456 million in penalties. KPMG LLP will not face criminal prosecution as long as it complies with the terms of its agreement with the government. On January 3, 2007, the criminal conspiracy charges against KPMG were dropped. [1] However, Federal Attorney Michael J. Garcia stated that the charges could be reinstated if KPMG does not continue to submit to continued monitorship through September 2008. [2]

[edit] Individual Indictments

On 29 August 2005, nine individuals, including six former KPMG partners and the former deputy chairman of the firm, were criminally indicted in relation to the multi-billion dollar criminal tax fraud conspiracy. The nine individuals named in the indictment were:

  • Jeffrey Stein, former Deputy Chairman of KPMG, former Vice Chairman of Tax Services, and former KPMG tax partner, a lawyer with a Master’s in tax law.
  • John Lanning, former Vice Chairman of Tax Services, and former KPMG tax partner, a CPA (Certified Public Accountant).
  • Richard Smith, former Vice Chairman of KPMG in charge of Tax, a former leader of KPMG’s Washington National Tax, and former KPMG tax partner, a lawyer.
  • Jeffrey Eischeid, former head of KPMG’s Innovative Strategies Group, former Partner-In-Charge of KPMG’s Personal Financial Planning Group, and former KPMG tax partner, a CPA.
  • Philip Wiesner, former Partner-In-Charge of KPMG’s Washington National Tax and former KPMG tax partner, a lawyer with a Master’s in tax law and a CPA.
  • John Larson, a lawyer, CPA and former KPMG Senior Tax Manager who left KPMG to form a series of entities with defendant Robert Pfaff, which entities participated in certain tax shelter transactions as the purported investment advisor.
  • Robert Pfaff, a lawyer, CPA and former KPMG tax partner, who left KPMG to form a series of entities with defendant John Larson.
  • Raymond J. Ruble, also known as R.J. Ruble, a lawyer and former tax partner in the New York, New York, office of Sidley Austin, a prominent national law firm.
  • Mark Watson, former Partner-in-Charge of the Personal Financial Planning division in KPMG’S Washington National Tax, and former KPMG tax partner, a CPA.

On 27 October 2005, another ten individuals were indicted on criminal conspiracy and tax evasion charges:

  • Richard Rosenthal, former Chief Financial Officer of KPMG, former Vice Chairman-Tax Operations, and former KPMG tax partner, a CPA.
  • Larry Delap, former Partner-in-Charge of KPMG’s Department of Professional Practice-Tax, and former KPMG tax partner, a CPA.
  • Steven Gremminger, a former Associate General Counsel in KPMG’S Office of General Counsel serving as the primary contact for the tax practice, and former KPMG partner, a lawyer.
  • David Amir Makov, who joined defendants Larson and Pfaff in forming entities which participated in certain tax shelter transactions as the purported investment advisor.
  • Greg Ritchie, former head of KPMG’s CaTs group, and a KPMG tax partner, a CPA. After leaving KPMG, Ritchie has been serving as the CFO of a business in Beverly Hills, CA.
  • Randy Bickham, former KPMG tax partner, a CPA.
  • Carol Warley, former KPMG tax partner, a CPA.
  • David Rivkin, former KPMG tax partner, a CPA.
  • Carl Hasting, former KPMG tax partner, a CPA.
  • David Greenberg, former KPMG tax partner, a CPA.

[edit] Trials in Progress

On 28 March 2006, David Rivkin pleaded guilty to charges of conspiracy and tax evasion in U.S. District Court in Manhattan. "I knew that the losses should not have been claimed on the tax forms," Rivkin told U.S. District Judge Lewis A. Kaplan. Rivkin admitted that he conspired with others between January 1999 and May 2004 to prepare and execute false documents so that clients could file false tax returns. He also admitted that he took steps to conceal the existence of fraudulent tax shelters from the Internal Revenue Service and avoided registering the shelters with the IRS by claiming attorney-client privileges. Rivkin signed an agreement to cooperate with prosecutors, who could then ask the judge to consider giving Rivkin a more lenient sentence rather than the years he might face in prison. Sentencing was set for Feb. 9, 2007.

On 27 June 2006, U.S. District Judge Lewis Kaplan of the United States District Court in Manhattan ruled that by threatening KPMG with indictment unless the firm reneged on its policy of paying the defense costs of partners who were indicted for work performed in the course of the firm's tax shelter business, the Department of Justice violated the constitutional rights of employees. In his opinion, Judge Kaplan agreed with the defendants' contention that KPMG was improperly pressured to pay their legal expenses, "because the government held the proverbial gun to its head."

In a related development, a civil case was brought against the Internal Revenue Service in late 2004 by two Texas lawyers, Harold W. Nix and C. Cary Patterson. Nix and Patterson sued the IRS for refunds after the tax agency denied each of their claims for nearly $67 million in deductions stemming from their use of the BLIPS tax shelter in 2000. Their lawsuit is thought to be relevant to the KPMG tax shelter fraud case, because BLIPS is one of the tax shelters alleged to be abusive by the prosecution in that matter. On 20 July 2006, Judge T. John Ward of United States District Court for the Eastern District of Texas ruled that the use of BLIPS by Nix and Patterson was essentially legitimate, because the I.R.S.’s application of tougher Treasury Department rules in 2003 to liabilities that occurred in BLIPS was “ineffective” and “not enforceable” because it was retroactive. The Internal Revenue Code generally prohibits retroactive regulations. In response to this ruling, prosecutors in the KPMG case have indicated that they will argue that the BLIPS shelter itself was technically valid, but that the way the defendants carried it out was fraudulent. In turn, lawyers for the defendants argue that no court of law has ever ruled that the tax shelters in question were illegal.

Some of KPMG's tax shelter clients are now suing KPMG for the liability exposure.

Whistleblower Michael Hamersley testified before the U.S. Senate Finance Committee and assisted the investigations of U.S. Senate Homeland Security Governmental Affairs Committee's Permanent Subcommittee on Investigations. The subcommittee's report (S. Rept. 109-54) detailed the misconduct.

[edit] References

U.S. Senate Permanent Subcommittee on Investigations Tax Shelter Hearing

Information on KPMG Partner Tax Shelter Indictments and KPMG Deferred Prosecution

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