KPMG Indictment

A number of former partners of the accounting firm KPMG were indicted on tax fraud charges related to the design, marketing, and implementation of fraudulent tax shelters.^[1] In addition to the indictment, the firm itself has admitted to criminal wrongdoing and has agreed to pay $456 million in fines, restitution, and penalties in exchange for receiving deferred prosecution.^[2] We have previously discussed deferred prosecutions here.

The indictment focuses on four shelters that the conspirators called FLIP, OPIS, BLIPS and SOS.^[3] KPMG, the indicted individuals, and their co-conspirators allegedly concocted tax shelters and targeted them to wealthy individuals who needed a minimum of $10 or $20 million in tax losses so that they would pay fees that were a percentage of the desired tax loss to KPMG, certain law firms, and others instead of paying billions of dollars in taxes owed to the government.^[4] In doing so, KPMG, the individual defendants, and their co-conspirators allegedly filed false and fraudulent tax returns that claimed phony tax losses, as well as deliberately concealing the existence of the shelters from the IRS by failing to register the shelters with the IRS, fraudulently concealing the shelter losses and income on tax returns, and attempting to hide the shelters using sham attorney-client privilege claims.^[5]

The statutory provisions at issue in this case are 26 U.S.C. §§ 7201, 7206(1), and 7206(2).

Attempt to Evade or Defeat Tax
Under 26 U.S.C. § 7201, any person who willfully attempts to evade or defeat any tax imposed by Title 26 of the US Code, or attempts to evade or defeat the payment of that tax, is guilty of a felony.

The penalty for an individual who violates section 7201 is a fine up to $100,000, imprisonment for up to five years, or both, and the cost of the prosecution. In addition, any other related penalties can be imposed.

Fraud and False Statements
Under 26 U.S.C. § 7206(1), any person who willfully makes and subscribes any return, statement, or other document, which is verified by a written declaration that it is made under the penalties of perjury, and which he in reality does not believe to be true and correct, is guilty of a felony.

Under 26 U.S.C. § 7206(2), any person who advises or helps with the preparation of a fraudulent or false tax document is guilty of a felony.

The punishment for an individual who violates sections 7206(1) and (2) is a fine up to $100,000, imprisonment for up to three years, or both, as well as the costs of prosecution.

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[1] US Dept. of Justice, Press Release: KPMG to Pay $456 Million for Criminal Violations in Relation to Largest-Ever Tax Shelter Fraud Case, Aug. 29, 2005, available here [hereinafter USDOJ]. See also, Jonathan D. Glater, 8 Former Partners of KPMG are Indicted, N.Y. Times, Aug. 30, 2005, at C1, available here; Jonathan Weil, Nine are Charged in KPMG Case on Tax Shelters, Wall St. J., Aug. 30, 2005, at C1, not readily available online.
[2] USDOJ, supra.
[3] Id.
[4] Id.
[5] Id.