South Carolina tax officials are considering barring KPMG from representing taxpayers in disputes with the state's revenue department.
According to the Wall Street Journal, the move would be the first disciplinary action against KPMG by a government body over the firm's tax-shelter practices.
The South Carolina Department of Revenue could decide on either a temporary or permanent bar as soon as next month.
South Carolina has been investigating KPMG's sales of tax shelters to state residents for a year. The Journal, which obtained an Aug. 10 letter from the state's revenue department to a former KPMG client, reported that the state's investigation "centers on KPMG's conduct in the sale of certain tax shelters, principally FLIP and OPIS, to residents of this state." The Internal Revenue Service declares both shelters to be abusive; that is, designed not for business purposes but specifically to avoid taxes.
According to the Journal, the letter said the state is concerned with whether KPMG violated state laws that prevent tax practitioners from charging certain fees for preparing a state income-tax returns. The fees, called contingent fees, are based on a percentage of the tax refund or savings. The huge savings clients could see with tax shelters would produce lucrative contingent fees for the accountants.
Another state law that is in question is whether KPMG wrongly advised clients that they could not consult with outside tax professionals for advice on KPMG's strategies.
Burnet Maybank, the South Carolina revenue department's director, would only say that his department is investigating multiple firms over tax-shelter sales. A KPMG spokesman declined comment.
Maybank said about 40 residents in recent years have purchased abusive tax shelters, not just from KPMG but other firms as well. The residents' combined state-tax savings may hit $25 million, which, "by South Carolina standards, is significant money," he said.
If the state does decide to bar KPMG from representing taxpayers in revenue department disputes, some residents may go elsewhere for tax preparation. That's because tax clients usually want their preparers' assurance that they will stand behind their returns and represent clients if they face government challenges.
Any disciplinary action by the state would not affect the firm's license to practice in South Carolina or its audit operations. Tom Fitzgerald, a KPMG spokesman told AccountingWEB that "the South Carolina Department of Revenue has requested information from KPMG LLP regarding the marketing of and provision of services concerning certain tax strategies that the firm no longer provides. "The firm is cooperating fully in South Carolina's inquiry."