Tax shelters sold by accounting firm KPMG cost the Treasury at least $1.4 billion while netting the firm $124 million, a Senate subcommittee report said Tuesday.
KPMG said that the tax shelters were not illegal but that it had stopped offering them. But senators urged a crackdown on promoters of abusive tax shelters after hearing the findings and testimony about how the "paper tiger" Internal Revenue Service was losing the war against tax shelters.
"The fact is, abusive and potentially illegal tax shelters sold to corporations and wealthy individuals rob the U.S. Treasury of billions of dollars in lost tax revenues annually," said Sen. Norm Coleman (R-Minn.), chairman of the Senate Permanent Subcommittee on Investigations.
Tax shelter activities cost the IRS an average of $11 billion to $15 billion each year from 1993 to 1999, Coleman said, citing the General Accounting Office.
"It's very clear that penalties will have to be increased," he said after the first of two hearings focused on tax shelters offered by KPMG -- one of the Big Four accounting firms -- and detailed in a report by the subcommittee's Democratic staff.
Sen. Carl Levin of Michigan, the panel's ranking Democrat, said he would introduce legislation raising penalties for someone caught promoting abusive tax shelters -- those that have no business or economic purpose other than tax avoidance.
The current fine of $1,000 was "a big joke," he said. "There's no way that is anything other than a parking ticket."
The subcommittee report said KPMG had marketed four tax shelters -- nicknamed BLIPs, FLIPs, OPIS and SC2 -- to more than 350 individuals from 1997 to 2001.
The IRS later determined that three of the products, BLIPs, FLIPs and OPIS, were potentially abusive or illegal tax shelters; the fourth, SC2, is still under review, the report said.
"All four generated significant fees for the firm, producing total revenues in excess of $124 million," it said.
"Evidence made available to the subcommittee suggests that lost revenues are also significant, including documents which show that, for 169 out of 186 BLIPs participants for which information was recorded, federal tax revenues were reduced by $1.4 billion," the report said.
Levin said: "Potential clients were persuaded to buy and use the deceptive shelters KPMG was peddling, and the U.S. Treasury was effectively defrauded of taxes owed as a result."
KPMG partner Jeffrey Eischeid told the panel that "none of these strategies -- nor anything like these tax strategies -- is currently being presented by KPMG." He said the shelters had been consistent with laws in place at the time.
But Levin said he was skeptical that KPMG had changed, noting it had not registered any of its 500 active tax products with the IRS as required by law.
Other experts said IRS enforcement needed to be stepped up.
"The IRS is increasingly seen as a paper tiger," said Calvin Johnson, a tax professor at the University of Texas. Johnson also said accounting firms that audit financial statements should not also offer tax shelters.
"The CPAs are trying to be both the cop, the FBI task force and also the consigliere to the very same dons, the very same family, at the very same time, and it does not work," he said.