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KPMG Admits Creating Fraudulent Tax Shelters

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KPMG Admits Creating Fraudulent Tax Shelters

Law

KPMG Admits Creating Fraudulent Tax Shelters

KPMG Admits Creating Fraudulent Tax Shelters

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Accounting firm KPMG appears to have escaped criminal prosecution for marketing what it admits were fraudulent tax shelters. The government has agreed to set those charges aside. But the company will have to pay $456 million in fines, and eight former executives still face charges.

RENEE MONTAGNE, host:

Time now for business news. The accounting firm KPMG appears to have escaped criminal prosecution for marketing what it admits were fraudulent tax shelters. The government has agreed to set those charges aside, but the company will have to pay half a billion dollars in fines and eight former executives still face charges. NPR's Larry Abramson reports.

LARRY ABRAMSON reporting:

The agreement spares one of the big four accounting firms from potentially devastating criminal charges. As part of the deal, KPMG admits it sold fraudulent tax shelters to wealthy individuals and corporations. Mark Everson is commissioner of the Internal Revenue Service.

Mr. MARK EVERSON (Commissioner, IRS): Simply stated, if you had a multimillion-dollar tax liability, KPMG would find a way to wipe it out, even when the firm's own experts thought the transactions would not survive IRS scrutiny.

ABRAMSON: In addition to paying $456 million in fines, KPMG also faces permanent restrictions on its tax practice. The company is barred from selling certain tax products and can only accept fees based on hourly rates. That's to address charges that the company basically collected a commission for sheltering certain capital gains from taxes. And the company will face oversight from an independent monitor, Richard Breeden, former chair of the Securities and Exchange Commission.

But KPMG may have escaped the ultimate penalty, criminal charges, which effectively destroyed Arthur Andersen in the wake of the Enron scandal. The Justice Department will defer prosecution for a year and then decide whether to drop the charges entirely if the company has behaved. Attorney General Alberto Gonzales says the decision was a balancing act to avoid shutting down the company's auditing business.

Attorney General ALBERTO GONZALES: We have zero tolerance for corporate fraud, but we also recognize the importances of avoiding collateral consequences whenever possible.

ABRAMSON: Tougher tax law are suppose to make it riskier for taxpayers to buy into the kinds of shelters that KPMG used to market, but Georgetown University law Professor Ethan Yale says someone somewhere will try to devise new shelters.

Professor ETHAN YALE (Georgetown University): There's wide agreement that the IRS is outgunned, the taxpayers' potential tax savings are enormous. So the taxpayers can spend lavish sums finding the highest quality professional representation and the government just can't match that with team of civil servants.

ABRAMSON: KPMG released a statement saying the company regrets the former tax practices. The company said that the eight former employees facing indictment are no longer associated with the firm and that KPMG has put in place elevated standards for its remaining tax business. The company stopped marketing the tax shelters in question in 2002, but KPMG still faces lawsuits from clients who paid billions to the government in back taxes and fines.

Larry Abramson, NPR News, Washington.

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