KPMG Fights Back at Hearing on Tax Promoter Issues
Earlier this year, the summonses received wide press coverage when the Department of Justice (DOJ) revealed  the names of clients, while trying to enforce summonses issued to KPMG. According to the DOJ's legal brief, the burden of proof at the hearing is on KPMG to show cause why the court shouldn't enforce the summonses.
Highlights of arguments by KPMG and DOJ:
- KPMG. In a preliminary statement filed with the district court, KPMG said it has been served 25 summonses so far this year in connection with its role as a promoter of tax shelters. It has already produced 417 boxes of documents. But it has objected to certain information requests on the grounds the information is privileged. Further, KPMG observed that the government's requests are difficult to understand and constitute something of a fishing expedition, since the IRS has asked for information about clients who considered a transaction, but did not invest in it. KPMG also noted that it is extraordinarily difficult to comply with the summonses because some of the records are kept at foreign affiliates whom it can't order or direct to produce papers.
- DOJ. The DOJ's reply pointed out that KPMG is an accounting firm, not a law firm, so its practitioners are prohibited from practicing law and none of its clients could have sought legal opinions or services from KPMG. DOJ further argues that the privilege doesn't apply for several reasons: (1) some clients chose to waive their privilege, (2) the information KPMG wants to withhold was information communicated to, not from, clients, and (3) obtaining "canned" legal opinions for penalty-avoidance purposes effectively waives any privilege, as does filing a suit for refunds based on shelters. In summary, the DOJ says the courts have characterized the IRS's summons power as a "license to fish."
During the hearing, KPMG explained that some of the documents at issue involve communications between KPMG personnel and the firm's general counsel. The judge said he will issue a ruling after the court has reviewed documents claimed to be privileged.
The hearing is the most recent development in a case in which the DOJ charges that, "over the past five years KPMG has aggressively developed and promoted a raft – nay, an armada – of tax shelter schemes that are so convoluted and complex that not even its own clients understand them." A list of tax shelter strategies alleged to have been promoted by KPMG is provided in the DOJ's reply brief. Apparently, it was compiled from information supplied by an informant. The list includes several tax accounting strategies, such as bad debt reserve acceleration strategies. But the titles of the strategies are not sufficient to provide an understanding of the tax shelters.