E&Y Questionable Tax Advice Exposed

An article in the Thursday, June 20 New York Times describes tax planning techniques offered by Big Five firm Ernst & Young to some of its wealthiest clients and quotes financial professionals who suggest that the tax tips may not be entirely on the up and up.

A financial advisor who attended an Ernst & Young meeting at which these tax avoidance/deferral vehicles were described found his outrage at the way in which taxable transactions were being hidden from the Internal Revenue Service was keeping him up at night, so the unnamed source broke his confidentiality agreement with E&Y and went to the newspaper with the details.

E&Y offers four tax avoidance/deferral techniques to certain clients with income levels in the millions. One technique is directed toward executives with stock options producing a profit of at least $5 million. Another reaches out to taxpayers with at least $20 million in income. Yet another scenario applies to someone with a large profit from an investment, and people who want to sell their businesses use a fourth technique.

The premise behind at least one of the techniques is to move income through various entities such as partnerships and S corporations in such a way as to defer tax payment and in some cases avoid taxes altogether. "Using partnerships is brilliant," said the financial advisor who provided the descriptions. "All the individual tax return would show is routine income and gain or loss from a partnership. You would have to have the most suspicious and thorough and intelligent auditor in the world to find this, and he would have to peel back several layers to find the real stuff."

The New York Times interviewed Sheldon Cohen, a former IRS commissioner, who said that if the transactions "depend on keeping them several steps away from the individual's tax return so they aren't discovered in an audit, then it's fraud."

E&Y responded to the article with the statement, "Under no circumstance would Ernst & Young authorize advising a client to conceal income or evade taxes. We strongly resent the implication of this article that we would do so."

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