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Big Four Firms Feel Heat of Senate Tax Shelter Probe

Nov 19, 2003 | www.webcpa.com

Called on the carpet by congressional investigators about promoting abusive tax shelters, representatives of several top accounting firms told a Senate Government Affairs Subcommittee that they engaged in “regrettable†activities during the late 1990s in response to the clamor for aggressive tax reduction strategies from clients enriched by the booming stock market.

“The stock market boom and the proliferation of stock option awards in the 1990s created an unprecedented number of individual taxpayers with large gains and significant potential tax liabilities,†Ernst & Young Tax Services vice chair Mark Weinberger said during hearings before the panel.

Initially, he said, E&Y “looked for legitimate and appropriate tax planning ideas†to respond to client needs, but “these efforts rapidly evolved into competitive and widespread marketing†of tax shelter strategies a shift that Weinberger attributed to “the tenor of the times.â€

PricewaterhouseCoopers’ senior tax partner Rick Berry struck a similar chord in separate testimony before the subcommittee.

“In the 1990s there was increasing pressure in the marketplace for firms to develop aggressive tax shelters that could be marketed to large numbers of taxpayers,†and “regrettably, our firm became involved in three types of these transactions,†he said.

KPMG, which sent several representative to the subcommittee’s hearings, also argued that the shelters promoted by their firm in the late 1990s and early 2000 were designed in response to increased client demand for tax reduction strategies during the nation’s economic boom.

“The tax strategies being discussed today represent an earlier time at KPMG and a far different regulatory and marketplace environment,†KPMG Washington national tax partner-in-charge Philip Weisner explained.

Although he insisted that the tax strategies marketed by his firm “were consistent with the laws in place at the time,†Weisner said new policies have been implemented by KPMG to prevent the promotion of such tax shelters in the future.

The representatives from PwC and Ernst & Young also testified that their firms have pulled out of the business of promoting the kind of aggressive tax strategies being investigated by the subcommittee.

Sen. Carl Levin, D-Mich., the panel’s ranking Democrat, wasn’t letting the accounting industry off the hook, however. During relentless questioning of industry witnesses during the hearing, Levin repeatedly pressed for details of accounting firm shelter marketing activities that he termed abusive.

"I'm afraid we cannot trust this industry to police itself," Levin said.

For his part, subcommittee chairman Sen. Norm Coleman, R-Minn., suggested that the type of tax shelters promoted by accounting firms in recent years have cost the Federal government between $33 billion and $85 billion in lost revenue.

These funds “could have financed a significant portion of our costs in Iraq,†he said. “This is not a victimless crime.â€


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