Senate Panel to Probe KPMG Tax Shelters

From 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 by the Senate Governmental Affairs investigations subcommittee.

Tuesday's testimony is expected to provide a look at tax shelter development and marketing. Thursday's hearing 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 whistle-blowers inside KPMG, said the transactions had virtually no business purpose other than to reduce taxes for those who used them.

The Internal Revenue Service ruled in 2000 that the basis for three of the four transactions makes 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."

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," he said.

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

Levin said the penalties must be dramatically increased for anyone who abets illegal tax sheltering. He said the promoters should face penalties equivalent to those faced by the taxpayers, who lose the tax benefit and pay penalties on top. Promoters now are fined $1,000.

"That's ridiculous. The fees that are paid here are huge," Levin said. "These folks are not deterred by $1,000 fines."

One transaction investigated by the subcommittee, the S-Corporation Charitable Contribution Strategy, targeted people who owned a type of corporation that passes income, and thus taxes, through to its shareholders. These people typically had a 100% stake in the corporation and made at least $3 million.

They reduced taxes on the company's income by temporarily allocating it to a tax-exempt entity. They also got a tax deduction for donating nonvoting stock, which was created specifically for this transaction, to the tax-exempt group.

The subcommittee found evidence that about a half-dozen tax-exempt entities participated, but the panel learned the identity of only two -- the Los Angeles municipal pension fund and an Austin, Texas, firefighters' pension fund.

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