KPMG agreed to pay a $456 million fine and admitted in U.S. District Court in New York on Monday that it sold fraudulent tax shelters designed to help wealthy clients avoid taxes, the Associated Press reported. Eight former tax partners and a lawyer who provided advice to KPMG were indicted for tax shelter fraud and are due to be arraigned August 31, the AP and Bloomberg News reported. The settlement announced Monday allowed KPMG to avoid criminal prosecution and ended a long struggle between the firm and the government.
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The Justice Department called it the largest criminal tax case ever filed, and said the KPMG scam allowed the firm's clients to avoid paying $2.5 billion in taxes. "Today's agreement requires KPMG to accept responsibility and make amends for its criminal conduct while protecting innocent workers and others from the consequences of a conviction," said Attorney General Alberto Gonzales, according to the AP.
KPMG chairman and CEO Timothy Flynn noted in the firm’s statement that the men indicted in the scheme are no longer with the company. "We regret the past tax practices that were the subject of the investigation," he said. "KPMG is a better and stronger firm today, having learned much from this experience.”
The settlement amount covers tax shelter promoter penalties, restitution and disgorgement of fees. The agreement also resolves an investigation of the firm by the IRS, Bloomberg reported.
The terms of the agreement require KPMG to accept an outside monitor for at least three years, and the firm could still face charges for at least five years if it violates the agreement, the New York Times reported. The independent monitor, appointed by the Justice Department, is Richard Breeden, a former Securities and Exchange Commission chairman who has also served as a court-appointed monitor for MCI Inc., the AP reported.
KPMG has also agreed not to take on new individual clients for 30 days and any tax opinions to clients must be likely to survive an IRS audit. The previous standard required that the advice be ``more likely than not'' to win IRS approval.
KPMG will pay the $456 million in installments over the next 16 months, beginning with a payment of $256 million due September 1, the Wall Street Journal and Bloomberg reported. The penalties come to about $300,000 per partner, based on the 1,524 partners KPMG reported in 2004, according to the Wall Street Journal.
KPMG is expected to survive, the Wall Street Journal said. Former Securities and Exchange Commission Chairman Arthur Levitt told the newspaper “I think their audit clients will stand by them, because as they survey the field, the alternatives are certainly no better, and hopefully, KPMG has moved strenuously to correct the problems of the past.”
In a prepared statement on the settlement, Attorney General Gonzales commented further on the consequences of indicting KPMG, "Every case is different. And the appropriate law enforcement response will be different depending on a variety of factors. Today's announcement reflects the reality that the conviction of an organization can affect innocent workers and others associated with the organization, and can even have an impact on the national economy. The Department's longstanding principles take account of such collateral consequences of prosecuting an organization.”