Feds opt against going after KPMG

The Justice Department said the KPMG scam was the largest criminal tax case ever filed and that it allowed the firm’s clients to avoid paying $2.5 billion in taxes.

Prosecutors said the investigation continues against individuals and businesses that facilitated the tax shelters, as well as those who benefited from them.

Internal Revenue Service Commissioner Mark Everson said the firm’s conduct had exceeded “clever lawyering and accounting” and amounted to plain theft from the people.

The eight former executives, most of them one-time KPMG tax partners, were indicted in New York along with an outside lawyer who had worked with the firm on a charge of conspiring to defraud the IRS.

The fine includes $128 million in forfeited fees that KPMG earned by selling the fraudulent tax shelters.

Under the scheme, KPMG marketed the tax shelters to clients who made more than $10 million in 1997 and more than $20 million per year from 1998 to 2000, according to the indictment of the nine men.

Rather than paying tax on income or capital gains, the client could choose an amount of purported tax losses to offset the gains, paying KPMG and law firms as much as 7 percent of that amount in fees.

The firm then designed tax shelters disguised as legitimate investments, providing the clients fraudulent “opinion letters” suggesting the tax shelter losses would withstand IRS scrutiny, the indictment said.

Among those charged was Jeffrey Stein, who was named deputy chairman of KPMG in April 2002. His lawyer did not immediately return a call for comment.

Another was Jeffrey Eischeid, whose lawyer, Stanley Arkin, strongly criticized the government for bringing the case.

“The indictment of Jeffrey Eischeid and certain of his partners represents a serious abuse of federal prosecutorial discretion and as well a profound betrayal of its partners by KPMG,” Arkin said.

Federal prosecutors and KPMG engaged in what is known as a deferred prosecution agreement, meaning the prosecutors will not seek a grand jury indictment of the firm as long as it commits no further wrongdoing.

In a statement, KPMG chairman and CEO Timothy Flynn noted that the men indicted in the scheme no longer are with the company.

“We regret the past tax practices that were the subject of the investigation,” he said. “KPMG is a better and stronger firm today, having learned much from this experience.”

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