The Internal Revenue Service, with the help of the U.S. Department of Justice, filed suit against accounting firms KPMG and BDO Seidman on Tuesday, July 10, accusing both firms of withholding documents relating to tax shelters promoted and sold by the firms. In addition both firms were accused of withholding the names of some of the participants in firm-sponsored tax shelters.
The Tax Code requires that promoters of tax shelters register each shelter with the IRS before offering the shelter for sale and that firms must keep lists of shelter participants and make such lists available to the IRS.
Both firms deny any wrongdoing and claim the documents they have withheld fall under the accountant-client confidentiality privilege. "We have legitimate disputes regarding privileged documents," said KMPG spokesman George Ledwith in an article in USA Today.
BDO Seidman responded to the lawsuit with the following statement: "BDO Seidman and the IRS disagree as to what documentation the service is entitled to under the law."
Among other arrangements under examination, the IRS is scrutinizing tax shelters sold by KPMG wherein investors whose average investment was $2 million were able to deduct an average of $24.5 million each.
Eileen O'Connor, Assistant Attorney General for the Justice Department's Tax Division, defended the lawsuits, stating, "Certain tax shelter transactions are devised to exploit the complexity of the law to claim benefits Congress never intended. The Justice Department is working with the IRS in its efforts to root out and shut down abusive tax shelter promotions."
IRS Commissioner Charles O. Rossotti stated, "It is unacceptable for those holding themselves out as tax professionals providing legitimate tax advice to refuse to comply with legal disclosure requirements. It is not a game of hide and seek with the IRS."
Earlier this week analysts suggested the possibility that Ernst & Young would be one of the firms named in the suits. E&Y was taken to task last month regarding questionable tax advice after an article describing certain E&Y-promoted shelter arrangements appeared in The New York Times. Although E&Y was spared the arm of the law this time, the IRS has indicated there will be more action taken. The IRS has been studying tax shelters in depth since its Tax Shelter Disclosure Initiative, an amnesty program offered earlier this year that resulted in 621 disclosures affecting 947 tax returns and more than $16 billion in claimed losses and deductions. Treasury official Pamela F. Olsen indicated that the majority of tax shelters recommended by the largest accounting firms have yet to be analyzed.
The lawsuits are filed in Federal District Courts in Washington, DC (KPMG) and Chicago (BDO). This represents the first time the Justice Department has ever filed an action against a major accounting firm relating to a tax shelter.