Ernst & Young LLP agreed yesterday to pay $15 million to settle an Internal Revenue Service probe into the accounting firm's failure to disclose information about tax shelters it has sold to individuals and corporations since 1995.
Ernst also agreed to set up a new quality-control program and to share more information about how it registers tax shelters with the agency. IRS Commissioner Mark W. Everson said the deal with Ernst & Young could be a "good working model" for settlements with other such promoters of tax shelters.
Tax shelters cost the nation billions of dollars in unpaid taxes each year, according to the Treasury Department. At his confirmation hearing in March, Everson told the Senate Finance Committee that "there are clear indications that professional standards have eroded in some corners of the practitioner community." He added: "Attorneys and accountants should be the pillars of our system of taxation, not the architects of its circumvention."
In an effort to crack down on tax shelters, Congress told the IRS to issue rules under which promoters of the shelters are required to register with the agency. They are supposed to provide lists of clients who use certain kinds of transactions, including those whose purpose is to avoid paying taxes and those where clients pay fees of more than $100,000 or are sworn to secrecy in exchange for access to the shelters.
Ernst & Young did not admit or deny wrongdoing as part of the settlement, which did not address the propriety of the underlying tax shelters the firm sold to clients. "We felt that the cost of settlement was much less than the cost of a protracted battle with the IRS that would cause disruption for our clients and our people," said Mark A. Weinberger, a former Bush administration Treasury Department official who last year became vice chairman of Ernst's tax practice.
Earlier settlements involving PricewaterhouseCoopers LLP and Merrill Lynch & Co. over failure to register tax shelters didn't disclose amounts but did describe them as "substantial."
The IRS is currently investigating 90 accounting firms, law firms and other businesses selling tax shelters that the agency has deemed to be potentially abusive.
Some companies, including accounting firms KPMG LLP and BDO Seidman LLP, have fought IRS requests for information about shelters they sell, arguing that they cannot provide such information because it is subject to attorney-client privilege or tax-practitioner privilege under the tax code. IRS Chief Counsel B. John Williams Jr., who announced his resignation yesterday, warned in a speech last year that the legal privileges do not extend that far. Sen. Charles E. Grassley (R-Iowa), who introduced legislation last year to tighten loopholes related to registering tax shelters, said in a prepared statement that "violating tax shelter rules shouldn't be a negotiable offense."
"I just hope a $15 million penalty is large enough to get their attention," he added.
Sen. Carl M. Levin (Mich.), the ranking Democrat on the Senate Permanent Subcommittee on Investigations, which is probing the rampant sale of tax shelters by accounting and law firms as well as investment houses, said in a statement that he was "pleased" with the IRS action.
Arthur W. Bowman, editor in chief of the industry newsletter Bowman's Accounting Report, said the deal is a good strategic move for Ernst & Young. "Fifteen million for these firms is a small price to pay," Bowman said. "It gets them off the list, and it also makes them appear to be a leader in the settlement process."
In recent years big accounting and law firms have been targeted by their customers as well as the government. Investors who paid top dollar for advice on how to avert taxes during the booming 1990s have sued the firms after the IRS later rejected the strategies they were sold.
Ernst & Young, for example, provided advice on how to avoid payments on stock options to former top executives at Sprint Corp. who now could be on the hook for hundreds of millions of dollars in penalties and back taxes. Sprint pressured the officials to resign and the audit committee of its board of directors later voted to bar Ernst from providing personal tax advice to Sprint executives. Ernst shuttered the group that sold tax shelters to high-net-worth executives in the past year, Weinberger said.
Donald C. Alexander, a former IRS commissioner who is now a Washington tax lawyer, said he believes recent agency action on tax shelters, coupled with the private lawsuits filed by investors, will serve as a deterrent. "A lot of people have had the fear of God put into 'em," he said.
Ernst also agreed to set up a new quality-control program and to share more information about how it registers tax shelters with the agency. IRS Commissioner Mark W. Everson said the deal with Ernst & Young could be a "good working model" for settlements with other such promoters of tax shelters.
Tax shelters cost the nation billions of dollars in unpaid taxes each year, according to the Treasury Department. At his confirmation hearing in March, Everson told the Senate Finance Committee that "there are clear indications that professional standards have eroded in some corners of the practitioner community." He added: "Attorneys and accountants should be the pillars of our system of taxation, not the architects of its circumvention."
In an effort to crack down on tax shelters, Congress told the IRS to issue rules under which promoters of the shelters are required to register with the agency. They are supposed to provide lists of clients who use certain kinds of transactions, including those whose purpose is to avoid paying taxes and those where clients pay fees of more than $100,000 or are sworn to secrecy in exchange for access to the shelters.
Ernst & Young did not admit or deny wrongdoing as part of the settlement, which did not address the propriety of the underlying tax shelters the firm sold to clients. "We felt that the cost of settlement was much less than the cost of a protracted battle with the IRS that would cause disruption for our clients and our people," said Mark A. Weinberger, a former Bush administration Treasury Department official who last year became vice chairman of Ernst's tax practice.
Earlier settlements involving PricewaterhouseCoopers LLP and Merrill Lynch & Co. over failure to register tax shelters didn't disclose amounts but did describe them as "substantial."
The IRS is currently investigating 90 accounting firms, law firms and other businesses selling tax shelters that the agency has deemed to be potentially abusive.
Some companies, including accounting firms KPMG LLP and BDO Seidman LLP, have fought IRS requests for information about shelters they sell, arguing that they cannot provide such information because it is subject to attorney-client privilege or tax-practitioner privilege under the tax code. IRS Chief Counsel B. John Williams Jr., who announced his resignation yesterday, warned in a speech last year that the legal privileges do not extend that far. Sen. Charles E. Grassley (R-Iowa), who introduced legislation last year to tighten loopholes related to registering tax shelters, said in a prepared statement that "violating tax shelter rules shouldn't be a negotiable offense."
"I just hope a $15 million penalty is large enough to get their attention," he added.
Sen. Carl M. Levin (Mich.), the ranking Democrat on the Senate Permanent Subcommittee on Investigations, which is probing the rampant sale of tax shelters by accounting and law firms as well as investment houses, said in a statement that he was "pleased" with the IRS action.
Arthur W. Bowman, editor in chief of the industry newsletter Bowman's Accounting Report, said the deal is a good strategic move for Ernst & Young. "Fifteen million for these firms is a small price to pay," Bowman said. "It gets them off the list, and it also makes them appear to be a leader in the settlement process."
In recent years big accounting and law firms have been targeted by their customers as well as the government. Investors who paid top dollar for advice on how to avert taxes during the booming 1990s have sued the firms after the IRS later rejected the strategies they were sold.
Ernst & Young, for example, provided advice on how to avoid payments on stock options to former top executives at Sprint Corp. who now could be on the hook for hundreds of millions of dollars in penalties and back taxes. Sprint pressured the officials to resign and the audit committee of its board of directors later voted to bar Ernst from providing personal tax advice to Sprint executives. Ernst shuttered the group that sold tax shelters to high-net-worth executives in the past year, Weinberger said.
Donald C. Alexander, a former IRS commissioner who is now a Washington tax lawyer, said he believes recent agency action on tax shelters, coupled with the private lawsuits filed by investors, will serve as a deterrent. "A lot of people have had the fear of God put into 'em," he said.
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