Investing Tax Shelters Equals Big Fine For Kpmg
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
KPMG Faces Huge Fine for Tax Shelter Marketing
Summary
What happens when a world-renowned accounting firm like KPMG markets tax shelters to its elite clientele? Clients trust the source, KPMG, a giant in the public accounting sector with over 100 Fortune 500 clients, including General Electric, generating $100 million annually in fees. Internationally, KPMG is influential with over 1,600 partners. When this firm shifts, the industry pays attention.
Trouble on the Horizon
Seeing an opportunity for profit, KPMG began offering tax shelters, promising lucrative returns to their clients, with write-offs of 3 to 1 or more. The firm earned substantial revenue from these schemes, amortizing costs over a broad client base. Clients trusted these deals, given KPMG's esteemed reputation. However, the IRS noticed KPMG's activities, primarily due to concerns over the “at-risk” provision of the Internal Revenue Code. Without real financial risk from clients, deals are considered illegitimate by the IRS.
Overreaching and Consequences
KPMG's greed saw them marketing beyond their client list. They expanded to a cold-calling operation in Fort Wayne, Indiana, contacting potential clients nationwide. Many high-net-worth individuals took these calls, boosting KPMG's ventures even more. The IRS, upon discovering that the clients were not genuinely at risk, challenged these practices.
Settlements and Legal Battles
While some firms settled with the IRS and disclosed participant lists, KPMG's Chairman, Eugene O'Kelly, refused. This defiant stance complicated matters as KPMG faced potential criminal charges, similar to Arthur Andersen during the Enron scandal. Andersen’s conviction led to its downfall, despite being later overturned. KPMG now risked a repeat scenario.
Flynn’s Challenge
New Chairman Timothy Flynn was in a bind. Criminal charges could dismantle KPMG, driving clients to competitors. The government, too, faced a dilemma, having only four major firms left after Andersen's closure. Flynn gambled, admitting wrongdoing in a meeting with Federal prosecutors, offering room for negotiation.
The Government’s Decision
The government, choosing not to dismantle KPMG, deferred prosecution, imposing a $456 million penalty. By January, a federal judge confirmed KPMG's improved internal controls, absolving the firm from criminal charges.
Although KPMG's senior management claimed ignorance of these practices, skepticism remains. The tax shelter division, profiting immensely, was a significant operation, raising doubts about management's claimed unawareness.
Settlements and Lawsuits
Already, KPMG agreed to a $154 million settlement with affected clients, while others pursue individual lawsuits. This will likely result in further financial repercussions for KPMG's partners, intensifying internal pressure on the tax division. Is this any way to run an accounting firm?
Goodbye and Good Luck,
Richard Stoyeck
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