Ernst to Pay $15 Million in Tax Shelter Accord
Ernst & Young, one of the nation’s largest accounting firms, said Wednesday that it agreed to pay $15 million and let tax agents examine its books under a settlement ending an Internal Revenue Service investigation into the disclosure of tax shelters marketed and sold to wealthy clients.
Ernst & Young spokesman Kenneth Kerrigan said the accounting firm admitted no wrongdoing. “We still stand by our advice,” he said.
The IRS touted the accord as a model for future settlements. The agency has opened more than 90 investigations of tax preparation and accounting firms.
“This agreement constitutes a significant development in our continuing efforts to identify potentially abusive tax transactions,” IRS Commissioner Mark Everson said.
Sen. Charles E. Grassley (R-Iowa), chairman of the tax-writing Finance Committee, said the agreement underscores the need for stronger tax shelter laws.
“Violating tax shelter rules shouldn’t be a negotiable offense,” Grassley said. “I just hope a $15-million penalty is large enough to get their attention.”
The IRS began targeting tax shelters more intensively last fall, part of a program to concentrate its small enforcement budget on the most serious tax avoidance schemes.
This week, the IRS shut down a shelter that some accounting firms marketed to executives as a way to defer paying taxes on stock options. In June, the agency ordered a Chicago law firm to release the names of taxpayers who participated in shelters that shielded at least $2.4 billion from federal income taxes.
Last year, the government sued two other major accounting firms, KPMG and BDO Seidman, seeking documents related to tax shelters. The firms contend much of the information is protected by accountant-client confidentiality privileges.
The settlement with Ernst & Young surrounded questions about whether the firm complied with laws that require it to register certain tax transactions with the IRS and keep lists of taxpayers who purchase the arrangements.
“This is an admission that the accounting firms have been doing something they shouldn’t have done,” said Joseph Bankman, a professor at Stanford Law School.
He argues that promoters of tax shelters don’t register them with the IRS as required because there are few buyers for a shelter that may face scrutiny from the IRS.
Mark Weinberger, Ernst & Young’s vice chairman of tax services and a former Treasury Department official, said the firm would establish a national database of its tax transactions, including lists of participants.
The IRS will be permitted to monitor the firm’s policies and procedures, but it will not have access to client information unless it finds evidence of a possibly illegal transaction.
“There does need to be increased disclosure and clarity around what does need to be disclosed,” Weinberger said.
