Wealthy investors who bought questionable tax shelters to lower their tax bills are finding that they can't hide from state and federal regulators.
The Internal Revenue Service and California tax regulators are going to court to obtain client lists from accounting firms or insurers to identify investors who bought the shelters. The strategy appears to be working.
A federal judge on Monday upheld efforts of the IRS to obtain the names of two tax shelter clients of accounting firm KPMG, according to the New York Times. And last week, the California Franchise Tax Board subpoenaed client lists from two major insurance companies that may have insured questionable tax shelters against government intervention.
The subpoenas served Friday seek the names and addresses of all California residents and businesses who were issued policies or sought coverage for tax liabilities, fiscal events, tax indemnities or similar contingencies from 1999 to 2002, the San Jose Mercury News reported.
According to Franchise Tax Board spokeswoman Denise Azimi, accounting firms that were marketing tax shelters lined up insurance to convince clients that their money was safe. "It kind of closed the deal for some of these clients who were sitting on the fence," she said.
Azimi said the names of the insurance companies are confidential, though Hartford Insurance and AIG were named in a November report to the U.S. Senate Government Affairs investigations subcommittee on tax shelters sold by KPMG in the late 1990s and early 2000s.
The subpoenas are part of an aggressive effort to crack down on abusive tax shelters in California. The Franchise Tax Board has mailed 28,000 letters to taxpayers who may have used illegal tax shelters and the businesses that sell them. The board reminds tax scheme promoters that anti-shelter legislation signed last year requires them to turn over client lists by the end of this month.
On the federal level, the IRS issued a summons to KPMG in the spring of 2002 to obtain the names of clients who bought the tax shelter known as "Son of Boss." The shelter involved using short sales of options to create losses on paper to offset taxable income.
The firm did turn over information on dozens of other investors, but not two clients who sued KPMG last year to keep their names confidential. They argued that their identities were protected by "tax practitioner privilege," which has been compared to attorney-client privilege, but the judge on Monday disagreed.
Another group of investors is trying to keep their names from the IRS. The group is suing Sidley Austin Brown & Wood to prevent the law firm from identifying them.
KPMG is the subject of investigations by the Justice Department, the IRS and a federal grand jury for questionable tax shelters. Sidley Austin is also being investigated for promoting illegal tax shelters.