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The KPMG Tax Shelter Prosecutions

By Lawrence S. Feld

On Aug. 29, 2005, the Department of Justice, the IRS and KPMG LLP (KPMG) announced that an agreement had been reached with the U.S. Attorney's Office for the Southern District of New York resolving the Grand Jury investigation into tax shelters designed, developed and sold by KPMG from 1996 to 2002 and related conduct. The settlement also resolved the IRS's examination of these activities. KPMG and the government entered into a deferred prosecution agreement (DPA), pursuant to which KPMG acknowledged responsibility for engaging in a massive tax fraud conspiracy that generated at least $11 billion in fraudulent tax losses, which cost the government at least $2.5 billion in evaded taxes.

The DPA requires KPMG to pay a criminal fine of $128 million, restitution to the IRS of $228 million, and an IRS penalty of $100 million — a total of $456 million, to be paid by Dec. 21, 2006. These payments will not be tax deductible nor covered by insurance. The criminal charge will be dismissed on Dec. 31, 2006, if KPMG complies with the stringent terms and conditions of the DPA. These include:

  • Restrictions and elevated standards for tax practice;
  • Full cooperation with the government's ongoing investigation;
  • The tolling of the statute of limitations;
  • Maintaining a compliance and ethics program that meets the criteria of the Sentencing Guidelines;
  • An independent monitor to check compliance with the DPA; and
  • An IRS closing agreement that provides for enhanced oversight of KPMG's tax practice.

KPMG's global settlement enables it to avoid a criminal conviction that would probably have put it out of business like its former competitor Arthur Andersen LLP.

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