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Accounting Oversight Agency Targets Abusive Tax Shelters

The government's new top accounting regulator vows to be ''very heavy-handed'' with firms that sell abusive tax shelters

Nov 24, 2003 | USA TODAY

William McDonough, head of the Public Company Accounting Oversight Board, said Thursday that his agency will look for the kind of allegedly abusive shelters KPMG and other accounting giants have mass marketed to clients. Such shelters have cost the U.S. Treasury an estimated $85 billion, officials say.

Starting in the booming 1990s, major accounting firms responded to some clients' enormous earnings gains by devising cookie-cutter strategies to manufacture business activities that made no sense apart from generating tax losses.

Among the customers for the plans, court filings say, were California businessman William Simon, former Global Crossing CEO Gary Winnick and late NASCAR driver Dale Earnhardt. William Esrey departed as CEO at Sprint amid an IRS investigation of a shelter developed by Ernst & Young. The accounting firm in July agreed to pay $15 million to settle a broader IRS investigation of its shelter sales.

In Senate testimony, McDonough said policing tax shelters was not Congress' motive in establishing his regulatory board in the 2002 Sarbanes-Oxley Act. He said his staff in their annual inspections of major accounting firms will look for signs that they've marketed abusive tax shelters to audit clients, a practice McDonough called "completely inappropriate."

Representatives of KPMG, Ernst & Young and PricewaterhouseCoopers told the same Senate panel on Tuesday that they no longer market the kinds of aggressive tax avoidance plans highlighted in a staff report by the Senate investigations subcommittee.

IRS Commissioner Mark Everson told lawmakers that his agency has made abusive tax shelters a top priority in audits and enforcement actions. But he said Congress needs to appropriate more money to the IRS and greatly increase the penalties against promoters of abusive shelters. He called current penalties "chump change" that don't deter promoters who stand to make enormous gains.

The officials testified after lawyers, investment advisers and bankers described their roles in helping the big accounting firms market their tax plans.

William Boyle, former Deutsche Bank executive, said his company made 56 short-term loans totaling $7.8 billion that were essential to one of the KPMG tax shelters.

"Otherwise smart people just turned a blind eye," Sen. Norm Coleman, R-Minn., said of those who enabled the accounting firms to market their shelters.

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