Senate investigates KPMG tax shelters

ASSOCIATED PRESS

One of the largest accounting firms promoted dubious charitable deductions and complicated transactions to generate phony paper losses for clients, say Senate investigators who spent a year unwinding four tax products that KPMG sold to more than 350 individuals in the late 1990s and early 2000s.

The firm says it no longer offers the tax strategies.

The four shelters once sold by KPMG will be scrutinized this week during two days of hearings of the Senate Governmental Affairs investigations subcommittee.

Tomorrow’s testimony is to give an inside look at tax-shelter development and marketing. Thursday’s meeting aims to reveal roles played by other financial institutions that support and enable tax sheltering.

Subcommittee aides, who handled the project with the help of anonymous whistleblowers inside KPMG, said the transactions had virtually no business purpose other than to reduce taxes for individuals who used them.

The Internal Revenue Service ruled in 2000 that the basis for three of the four transactions make them potentially abusive shelters. The fourth, subcommittee aides said, is under investigation by the IRS.

In a written statement, KPMG said the strategies “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.”

“Today, KPMG only offers our clients tax services that are tailor-made to address their distinct business objectives and tax-planning needs,” the statement said.

Treasury Department officials have indicated that the market for tax shelters appears to be shrinking. But Sen. Carl Levin of Michigan, the top Democrat on the investigative subcommittee, disagreed.

“I don’t think we have any evidence that it’s slowed down at all,” Mr. Levin said.

Mr. Levin said case studies assembled by his subcommittee staff show that accounting firms marketed and developed potentially abusive shelters with the participation of banks, investment firms and lawyers. One shelter required cooperation from tax-exempt state and municipal pension funds.

He said the penalties must be increased dramatically for anyone who abets illegal tax sheltering.

At first blush, he said, the promoters should face penalties equivalent to the taxpayers, who lose the tax benefit and pay penalties on top. Promoters currently are fined $1,000.

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