Investing Tax Shelters Equals Big Fine For Kpmg

Investing Tax Shelters Equals Big Fine For Kpmg

Investing – Tax Shelters Equals Big Fine For Kpmg
What happens when a​ world renowned accounting firm decides to​ market tax shelters to​ its elite clientele? the​ first thing that happens is​ that the​ client buys them because of​ the​ source .​
In this case the​ source is​ utterly reliable; KPMG is​ one of​ the​ oldest and biggest Public Accounting firms in​ the​ world .​
They number among their clients over 100 of​ the​ Fortune 500 companies .​
This includes General Electric with a​ $100 million per year in​ fees .​
Internationally,​ KPMG is​ just as​ big and powerful,​ with over 1600 partners .​
When the​ firm sneezes,​ the​ industry notices .​
Somebody else was noticing too
They came to​ the​ conclusion that they could make a​ fortune by selling tax shelters to​ their client listing,​ and they were right .​
Clients leaped at​ the​ opportunity to​ take 3 to​ 1 and better write-offs from the​ schemes that KPMG came up with .​
The fees generated were mind-boggling,​ far more profitable than any other aspect to​ the​ accounting business .​
After all,​ once you​ put a​ tax deal together,​ your costs were fixed .​
If you​ could amortize the​ cost of​ a​ deal over more clients,​ there was that much more to​ be made for the​ firm.
The clients naturally assumed the​ deals were good because the​ KPMG name stood behind the​ deal .​
The problem was the​ at-risk provision of​ the​ Internal Revenue Code .​
Unless the​ client is​ at​ risk to​ be called on​ additional money by the​ terms of​ the​ deal,​ than the​ deal is​ deemed to​ be bogus by the​ IRS .​
The IRS was taking note of​ what KPMG was doing,​ and went after the​ firm,​ and this means the​ clients too .​
KPMG got greedy .​
They weren’t happy just marketing to​ their wonderful client list .​
Upon realizing the​ gold mine they had,​ they decided to​ market it​ to​ EVERYONE .​
a​ United States Senate committee reported that KPMG was marketing the​ shelters through a​ cold-calling operation run out of​ Fort Wayne,​ Indiana .​
Calling day and night,​ and using the​ Illustrious KPMG name,​ it​ was dialing for dollars.
Just about every millionaire in​ the​ country would take KPMG’s call,​ and many followed through and became clients .​
Other large public accounting firms took note of​ the​ action,​ and began their own forays into tax shelter marketing .​
The IRS once again took note,​ and developed an​ internal committee to​ deal with the​ excesses .​
When the​ IRS realized that the​ clients in​ these deals were not at​ risk,​ the​ accounting firms got called on​ the​ carpet for their actions .​

The smart firms settled with the​ IRS,​ and turned over their client lists of​ who participated in​ these deals,​ and the​ clients wound up settling too .​
The clients not only settled,​ but they paid interest and penalties as​ well .​
KPMG’s Chairman,​ Eugene O’Kelly on​ the​ other hand decided that they were going to​ take on​ the​ government,​ and NOT settle .​
This was a​ bold move (bold means stupid) for a​ bold firm to​ make .​
O’Kelly had a​ brain tumor and dropped out of​ the​ picture as​ they say,​ and left the​ problem in​ the​ lap of​ Timothy Flynn,​ the​ new Chairman .​
Flynn’s Dilemma
Here’s the​ problem .​
The government was in​ the​ process of​ making a​ decision to​ GO CRIMINAL on​ KPMG .​
The law specifies that if​ the​ accounting firm responsible for the​ tax shelter has totally abused the​ process,​ than criminal actions may proceed .​
If you​ remember it​ was only a​ few short years ago that Arthur Andersen,​ at​ the​ time a​ celebrated Public Accounting firm,​ was criminally indicted because of​ their actions involving the​ Enron audit .​
The verdict went to​ a​ jury in​ that case,​ and the​ jury decided on​ behalf of​ the​ government .​
Once the​ verdict went against Arthur Andersen,​ by law they were no longer allowed to​ sign off on​ audits of​ publicly traded companies reporting to​ the​ SEC .​
This meant Andersen could no longer service publicly traded companies .​
They immediately went out of​ business .​
At a​ later time,​ the​ verdict was overruled on​ appeal,​ but it​ was too late .​
The company had already gone out of​ business .​

KPMG was not facing an​ Arthur Andersen type indictment for marketing bogus tax shelters .​
The clients who bought them were facing their own troubles .​
Assessment letters went out nullifying the​ shelters,​ taxes were recomputed for the​ years involved,​ and interest and penalties were added .​
This is​ truly one of​ the​ worse pieces of​ mail you​ will ever receive from you​ postman .​
You had to​ make sure you​ had an​ empty stomach when you​ read it .​
KPMG – Do you​ bite the​ bullet or​ take the​ shot?
The new Chairman Flynn was between a​ rock and hard place .​
He knew criminal charges would probably wipe out the​ firm .​
Clients would scatter to​ the​ winds,​ and be picked up by the​ competition,​ just waiting for it​ to​ happen .​
The government also was in​ a​ tough corner .​
Remember they had already SHUT DOWN Arthur Andersen .​
There were only four major firms left .​
Do you​ take down another one,​ leaving three?
Flynn decided to​ make the​ gamble .​
He met with Federal prosecutors and throws himself at​ their mercy .​
He announces that the​ firm had been wrong in​ what it​ did .​
The government made no promises,​ but the​ admission gave the​ government room to​ maneuver .​
Keep in​ mind that this case had been going on​ for several years .​
During that period,​ the​ prosecutors played musical chairs,​ as​ they are constantly leaving the​ government to​ go into more lucrative private practice .​
Government cuts a​ deal
The government decided for the​ moment it​ was not in​ the​ people’s interest to​ put KPMG out of​ business .​
They deferred prosecution of​ KPMG for the​ moment,​ but the​ firm had to​ pay a​ $456 million penalty to​ the​ government .​
That’s right,​ it​ approached a​ half a​ billion dollars .​
In January,​ a​ federal judge was satisfied that KPMG had put in​ place sufficient internal controls to​ prevent a​ recurrence of​ this type of​ behavior .​
The judge killed the​ deferment,​ and the​ firm will not be criminally prosecuted .​
The firm’s senior management committee has denied having any knowledge of​ these tax shelters,​ to​ which we say SURE .​
This is​ the​ most profitable part of​ the​ firm amounting to​ hundreds of​ millions of​ dollars,​ and the​ guys in​ charge are nowhere to​ be found .​
Once again,​ let’s be clear about this – SURE.
By the​ way,​ so far KPMG has reached a​ $154 million settlement with the​ clients who purchased the​ shelters .​
Scores of​ clients chose not to​ participate,​ and are independently suing KPMG .​
There will be hundreds of​ millions of​ additional settlement to​ be share among the​ 1600 KPMG partners who are already griping that the​ tax division should be taking the​ hit alone for the​ settlements .​
The question we ask - is​ this any way to​ run an​ accounting firm?
Goodbye and Good Luck
Richard Stoyeck

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