Senate Probe Targets KPMG Tax Shelters, KPMG Responds

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Accounting firm KPMG's efforts to market four questionable tax products will be the focus of two days of Senate hearings this week. More below...

Senate Probe Targets KPMG Tax Shelters, KPMG Responds

KPMG'S Statement Before The Committee, November 18

KPMG'S Statement Regarding Hearing on the “U.S. Tax Shelter Industry”

More below...

The investigations panel of the Senate Governmental Affairs Committee took more than a year to examine the role of accounting firms, law firms, banks and investment advisers in creating and selling tax avoidance schemes.

The subcommittee's report says that tax shelters have been aggressively marketed in the last five years by some of the country's largest professional firms. The firms—rather than cheating taxpayers—are driving the use of tax shelters, the report says. The report and testimony focused largely on one KPMG product known as BLIPS -- Bond Linked Issue Premium Structure. Marketing began in 1999, and continued until September 2000, when the IRS listed it as potentially abusive. Senate investigators estimate it generated $80 million in fees for KPMG from 186 clients. It lost the U.S. Treasury more than $1.4 billion, the report says.

"The real engine are the professional groups that design and market these tax shelters, that hawk them, frequently telemarketing these tax schemes," said Sen. Carl Levin of Michigan, the panel's senior Democrat.

KPMG said in a statement that they no longer use any of the questioned tax strategies, which “represent an earlier time at KPMG and a far different regulatory and marketplace environment.” The firm said it had overhauled its tax products and had stopped several controversial marketing practices.

The investigations panel said KPMG set up a complicated internal system for creating and selling tax shelters, using confidential taxpayer information and a telemarketing operation to find customers.

With the help of company insiders, the panel found that KPMG used aggressive sales practices to sell four tax shelters to more than 350 people in the late 1990s and early 2000s. The IRS ruled in 2000 that the basis for three of the four transactions make them potentially abusive shelters. The IRS is investigating the fourth.

A hearing set for today is designed to give an inside look at tax-shelter development and marketing. A session Thursday is scheduled to reveal roles played by other financial institutions in enabling tax shelters.

Levin plans to use the hearings to support new legislation that would greatly increase the fines levied against promoters of tax shelters.

You may read the entire "Statement of KPMG LLP, Before The Permanent Subcommitte on Investigations Committe on Governmental Affairs, United States Senate."

KPMG LLP issued the following statement in regards to the hearing on Tuesday, November 18, by the U.S. Senate Committee on Governmental Affairs, at which current and former KPMG partners have been invited to testify on the subject of tax services formerly offered by the firm.

KPMG is committed to restoring confidence and trust in the accounting profession - and we have consequently made substantial improvements and changes in KPMG's tax practices, policies and procedures over the past three years to respond to the evolving nature of both the tax laws and regulations, and the needs of our clients. The tax strategies that will be discussed at the Subcommittee hearing represent an earlier time at KPMG and a far different regulatory and marketplace environment. None of the strategies - nor anything like these tax strategies - is currently being offered by KPMG.

We have also adopted clear, new guiding principles for our tax practice. It is no longer enough that tax strategies comply with the law or are technically correct; they must in no way risk the reputation of the firm or our clients. That is the standard by which we now judge all actions of the firm.

Some of the tax practice policies and structural changes implemented by KPMG over the past three years include the following.

Discontinued Tax Strategies

KPMG no longer offers or implements aggressive tax strategies specifically designed to be sold to multiple clients, such as FLIP, BLIPS, OPIS and SC². The look-alike tax strategies provided on a large scale to clients in the 1990s have all been discontinued, most over three years ago. FLIP was discontinued in 1998; OPIS in 1998; BLIPS in early 2000, and SC² in 2001.

Today, KPMG only offers our clients tax services that are tailor-made to address their distinct business objectives and tax planning needs. Additionally, KPMG does not and will not accept any new engagements for advice and opinions on tax shelters that have been listed and deemed abusive by the IRS.

Rigorous Review, Oversight

Over the past three years, KPMG has developed an increasingly more rigorous and formal review and oversight procedure within our tax practice. All tax strategies must undergo three levels of review and approval:

The new position of Partner in Charge of Tax Risk and Regulatory Affairs, analyzes tax strategies in terms of their risks to KPMG and to our clients. The Partner in Charge of our Washington National Tax practice signs off on the technical merits of all significant tax strategies. The Department of Professional Practice - Tax reviews all tax strategies to ensure that they are in compliance with the firm's policies and procedures.

Each of the partners in these positions has veto power over any tax strategy proposed by our firm and all operate independently from our Tax operations and business development functions.

In addition, in early 2000, KPMG's procedures with respect to list maintenance and registration obligations under the Internal Revenue Code became more formalized, and KPMG established the Practice Procedure & Administration group in Washington National Tax as the contact point for analysis of disclosure, list maintenance and registration issues. KPMG's procedures and training programs have been
updated continuously since that time, tracking developments in the law and fine-tuning the firm's compliance processes.

Tax Practices Eliminated, Positions Abolished

In 2002, KPMG eliminated two practices, Stratecon and Innovative Solutions, which were responsible for developing tax strategies specifically designed to be offered to multiple clients. Many of the partners who were part of these practices are no longer with the firm.

KPMG also eliminated the Tax Innovation Center, which was responsible for packaging and marketing tax strategies. Positions such as National Deployment Champions and Area Deployment Champions, which were charged with marketing these tax strategies to our clients, have been abolished.

Training Focuses on Technical Developments

We have discontinued weekly tax partner calls, training programs and other activities that focus on marketing tax services. Tax partner calls and training now concentrate on changes in the law and technical tax developments.

Compliance and Ethics Hotline

In 2002, KPMG implemented a firmwide Compliance and Ethics Hotline to encourage anyone within KPMG to raise concerns about any potential unethical, improper or illegal conduct within the firm. In addition to the confidential hotline, long existing channels of communication available to employees include our network of professional practice partners, Area Risk Management partners, the Office of General Counsel, and the Department of Professional Practice.

Audit Committees Approve Services for Executives

We have put in place more stringent rules about offering tax services to executives at our SEC audit clients. Consistent with the Sarbanes-Oxley Act, the Audit Committee of our SEC-audit clients must approve any non-audit services, including tax services, provided to the company.

We have applied this discipline to tax advice offered to executives of SEC-audit clients. Regardless of who is paying for the services (the company or the executive), we disclose to the Audit Committee the names of company executives who receive personal tax services from
KPMG so that the Audit Committee has transparency with respect to these services, and we require Audit Committee approval for certain types of transactions and services to executives. Where our audit client has a more restrictive policy, we scrupulously abide by it..

As always, we encourage anyone within KPMG to bring to our attention immediately any tax practices or policies that are inconsistent with these guiding principles and procedures. We also encourage our partners and professionals to provide suggestions on any additional
policies and procedures that will help ensure that we are providing the best tax services and advice to our clients.

KPMG takes seriously our responsibility to restore confidence and trust in the accounting profession. We want to work with Congress - as well as the IRS and other policymakers - as they consider sound and responsible approaches to better define what tax strategies are
allowable under the law and to further strengthen the enforcement of the tax code, including increased resources for the IRS and improved coordination among regulatory agencies. KPMG LLP is the audit, tax and advisory firm that has maintained a continuous commitment throughout its history to providing leadership, integrity and quality to the capital markets. The Big Four firm with the strongest growth record over the past decade, KPMG offers clients scale, global reach, industry insights, and a multidisciplinary range of services. KPMG LLP
( is the U.S. member firm of KPMG International. KPMG International's member firms have nearly 100,000 professionals, including 6,600 partners, in 150 countries.

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