The Kpmg Tax Fraud Case

Beginning in the 1990’s, KPMG began to commit tax fraud by seeking out wealthy clients and offering them tax shelters so they could jolt the firm into a power position. This idea was originally formed by the head of the tax department, Jeffrey Stein, and CFO, Richard Rosenthal, but other top managers and employees quickly became part of the scheme. KPMG created these tax shelters which led to $2.5 billion in evaded income taxes owed to the IRS. These tax shelters generated losses of $11.2 billion from 601 wealthy clients that were able to avoid paying these income taxes. The four tax shelters that KPMG used were the Foreign Leveraged Investment Program (FLIP), Offshore Portfolio Investment Strategy (OPIS), Bond Linked Issue Premium Structure

They failed to register their shelters with the IRS as is required, they tried to conceal their income on tax returns, and attempted to hide the tax shelters using false privilege claims. The head of the tax department and CFO also created a hostile environment that treated their fellow employees unfairly if they did not support the “growth at all costs effort” (Mintz). Once this fraudulent activity was exposed in 2003, the human resources director Timothy Flynn decided to meet with Justice Department and admit their wrongdoing over the years. The officials from the Justice Department were aware that if they prosecuted KPMG, they could risk harming the financial markets if they collapsed, something they learned from Enron years prior. They made an agreement that KPMG would pay a $456 million dollar fine, and terminate two of their practices areas, one of which was giving advice to wealthy clients, their most profitable sector. In addition to the fine and terminating two practices areas, the agreement also banned KPMG’s involvement with prepackaged tax products, they had to implement an ethics program, and they had to install an independent monitor to oversee the agreement for three

Under section 10.33, KPMG was required to provide high quality advice to their clients regarding the Federal tax issues, as well as have a clear understanding between the two regarding the form of advice. KPMG lied and stated that the clients requested their opinion, which they did not, and there was no clear understanding between the two because these opinion letters were full of false strategies to evade paying income taxes, and the clients were misled. This goes in hand with code section 10.37, requirements for written advice. This code states that the entity giving the written advice must use reasonable efforts to obtain the facts on each Federal tax matter, and base the written advice on legal assumptions. KPMG was giving out phony and misleading opinions and recommendations to their wealthy clients, stating that the tax strategies being used were legal, when they were in fact