The most prominent case in recent years, involving the much strengthened Internal Revenue Service’s enforcement division working with the Justice Department, has been the investigation of KPMG by a New York grand jury for promoting tax shelter abuses. The investigation concluded with the decision by the Justice Department not to pursue a criminal indictment of the firm, but to enter into a deferred prosecution agreement (DPA) in which KPMG admitted to substantial wrongdoing and agreed to pay penalties and implement reforms and higher standards. If KPMG meets the terms of the agreement, the Justice Department may dismiss the criminal charge.
| All Aboard the High-Velocity 2006 FRx Express! FRx Software has the engine fired up again to travel nationwide with timely training and expert guidance! Microsoft FRx and Microsoft Forecaster users, potential users and resellers don’t miss this FREE*, half-day event!
Once you’re on board, the FRx Software experts will help you gain tremendous insight into Microsoft FRx and Microsoft Forecaster. You’ll have the opportunity to hear customer perspectives and network with prospects plus pack in useful tips, and see the features and benefits of FRx Software’s financial analytic applications. Register now!
The terms of the DPA with KPMG are unusually detailed and could potentially affect other accounting firms and corporate tax departments. Scott Michel and Kevin Thorne, of the Washington D.C. law firm Caplin & Drysdale, have analyzed the implications of the agreement in Deferred Prosecution Agreements: Implications for Corporate Tax Departments, an article published in mondaq.com.
The DPA limits the tax services KPMG may provide, raises the bar for their standards for tax opinions and reporting of transactions on tax returns, and gives an outside Monitor wide latitude in internal matters, including personnel decisions. In addition, KPMG’s detailed admission of wrongdoing can affect ongoing criminal cases against former KPMG partners, as well as cases with other firms and taxpayers who are defending their use of tax shelters.
Federal prosecutors have increasingly used the DPA to settle corporate cases since the collapse of Enron and the fall of Arthur Anderson, the authors say, because the government has the power to charge a company if only one employee has been found guilty of criminal conduct, and it is very easy for prosecutors to find evidence for such cases. The DPA avoids the consequences to companies and to the government of prolonged, expensive litigation.
Among the factors the Justice Department considers before entering into a DPA are:
- The nature and seriousness of the offense;
- The pervasiveness of wrongdoing within the corporation
- The corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation;
- The existence and adequacy of the corporation’s compliance program
- The corporation’s remedial actions, including disciplining or terminating wrongdoers;
- Collateral consequences.
KPMG made a strong case for itself based on these factors, despite admitting that it had engaged in criminal tax fraud that cost the United States over $2.5 billion in lost taxes.
Under the terms of the DPA, KPMG made a set of “specific, detailed, and unequivocal admissions” of criminal wrongdoing, in writing, that can be used by the government in ongoing tax litigation. The 19 individuals, including former KPMG tax partners who are facing criminal charges in the tax shelter investigation, are arguing against the DPA, saying that the KPMG admission does not work as a “matter of substantive tax law.”
The agreement also includes restrictions on the kinds of tax services KPMG can provide to its clients in the future. It must cease advisory services to wealthy individuals and end its compensation and benefits practice. It must end marketing pre-packaged tax products. It can only bill by the hour for tax services.
KPMG has also agreed to a higher standard than existing law for future tax opinions or reporting on transactions in tax returns. It will adopt only reporting positions that “should” prevail. For individuals and small businesses, it has agreed to take a “more likely than not” position that reported transactions would be accepted if challenged. Only time will tell, the authors say, whether this will doom KPMG’s ability to provide tax services or whether it will raise the bar for other firms.
The independent Monitor KPMG has agreed to will have unlimited access to information and personnel and “may compel an interview with any KPMG personnel.” The Monitor has the power to recommend changes and KPMG has agreed to accept those recommendations.
The KPMG agreement means that corporate tax departments should recognize that earlier aggressive tax planning may now be the subject of criminal investigations, the authors say. A company under investigation has no choice but to cooperate. It must impose changes, including restructuring the tax compliance process, raising the standards for reporting positions, and providing increased oversight for tax compliance functions.
Michel and Thorn close by saying that the KPMG agreement incorporates standards and internal business practices that are likely to become “best practices” for everyone involved in tax compliance.