By Anne Rosivach
BDO USA LLP (BDO) the seventh largest US accounting firm, agreed on June 12 to pay a civil penalty of $34.4 million to the IRS and forfeit $15.6 million to the US government as part of a deferred prosecution agreement. BDO admitted that it helped US citizens evade about $1.3 billion in income taxes from 1997 to 2003 by failing to register various tax shelters as required by law in an effort to conceal the tax shelters from the IRS. Some of tax shelters were deemed abusive and fraudulent.
Under the agreement, the Chicago-based firm will not be prosecuted by the government on a criminal charge of tax fraud conspiracy if certain conditions are met. BDO has agreed to cooperate with the IRS in civil matters, including IRS audits and litigations relating to its tax shelter products, and to work with the IRS to ensure that it is in compliance with federal tax laws involving tax shelters.
The announcement of the agreement came after US District Judge William Pauley, who approved the deal, tossed out convictions in a 2011 suit against three BDO defendants, including BDO CEO Denis Field, on June 4, after finding that a member of the jury had lied about her past, including that she was an alcoholic and a suspended attorney with a criminal record.
The BDO settlement is the latest in a series of actions taken by the US government over a ten-year period that have targeted tax shelter abuses. The largest settlement to date, also part of a deferred prosecution agreement, was with KPMG, one of the Big Four firms, in 2005. KPMG agreed to pay $456 million in fines, restitution, and penalties. Two other Big Four firms, PwC and Ernst & Young, had settled with the IRS in 2002 and 2003, paying relatively small fines. At that time, KPMG continued to argue that that the shelters were legal, and as late as 2003, defended them in congressional testimony.
Criminal tax fraud charges against thirteen defendants from the KPMG accounting firm were rejected by a New York judge in 2007. Former partners from accounting firms were prosecuted over the ten-year period, but the firms were not indicted. Jenkens & Gilchrist, a Chicago law firm, closed its doors in 2007, after negotiating a deferred prosecution agreement.
"Today's enforcement action is another reminder that taxpayers can't hide behind complicated schemes or corporate tax shelters", said IRS Commissioner Doug Shulman. "The IRS is strongly committed to stopping illegal tax shelters."
The settlement and payment resulted from the following determinations, according to the IRS:
- Between 1997 and 2003, BDO violated federal tax laws concerning the registration, and maintenance and turning over to the IRS of tax shelter investor lists, involving abusive and fraudulent tax shelters.
- Primarily through a group within the firm known as The Tax Solutions Group, BDO developed, marketed, sold, and implemented fraudulent tax shelter products to high net worth individuals, who had, or expected to have, reportable income or gains in excess of $5 million.
- These fraudulent tax shelters, although designed to appear to the IRS to be investments, were, in fact, a series of preplanned steps that assisted BDO's high net worth clients to evade individual income taxes of approximately $1.3 billion.
- The fraudulent tax shelters were sometimes known under the following names: SOS, Short Sale, BEST, BEDS, Spread Options, Currency Option Investment Strategy or "COINS", Digital Options, G-1 Global Fund, FC Derivatives, Distressed Asset Debt, POPS, OPIS, Roth IRA, and OID Bond.
The IRS said that the agency was pleased with BDO's commitment to cooperate with the IRS in civil matters involving tax shelters and to ensure that it fully complies with the federal tax laws involving tax shelters.
BDO said it had cooperated with the IRS in the case.