homesheltersuncovering schemesprospects for reform

a closer look at one shelter promoter
The big four accounting firms and other tax shelter promoters came under fire from the IRS, the Treasury Department and Congress for their roles in developing and marketing questionable tax shelters during the 1990s. Here's a closer look at interviews, documents and the statements of company executives that offer more insight into the activities of one promoter, the accounting firm KPMG.

 interview with mike hamersley
photo of hamersley

Hamersley is a tax lawyer who joined the Washington National Tax office of KPMG in 1998. He tells FRONTLINE that he was bothered immediately by the firm's aggressive promotion of tax shelters and says that the most abusive shelters were kept secret even from company insiders. According to Hamersley, KPMG made a strategic business decision not to register its tax shelters, as required by the IRS, because "the penalties associated with not registering paled in comparison to the revenues that would be generated by those tax shelters that had to be registered." He also says that the fees KPMG received were determined by the amount of tax savings generated by the shelters and that the firm's top managers drove its shelter promotion. Hamersley says in court documents that he blew the whistle on KPMG after he was asked to sign off on tax matters that he considered to be illegal -- a charge disputed by KPMG.

 interview with carl levin
photo of levin

Spurred by the Enron investigation, Sen. Carl Levin (D-Mich), the ranking Democrat of the Senate Permanent Subcommittee on Investigations, led an investigation into the development and marketing of abusive tax shelters, with particular focus on the activities of KPMG. In this interview, he recounts the investigation and discusses the need for legislation to increase penalty fees for shelter promoters "to make sure that the penalties are just the same on the guys who cooked up the scheme as for the people who try to benefit from it -- the taxpayers themselves." Levin is hopeful about achieving tax shelter reform: "Enron has unleashed a real movement here to do some proper regulation," he says.

 U.S. Tax Shelter Industry: The Role of Accountants, Lawyers, And Financial Professionals

This report was released in conjunction with the Senate Permanent Subcommittee on Investigations' November 2003 hearings on abusive tax shelters. It offers four case studies of shelters marketed by KPMG -- FLIP, OPIS, BLIPS and SC2 -- to provide "an in-depth portrait of how a professional organization like KPMG, and the professional organizations it allies itself with, end up developing, marketing, and implementing highly questionable or illegal tax products." [Note: This file is a pdf; Adobe Acrobat is required]

 KPMG Exhibits

Here is a collection of e-mails, memos and other internal documents that were uncovered during the Senate Permanent Subcommittee on Investigations' probe into KPMG. The documents reveal how KPMG marketed and sold its shelters; how the firm calculated that it would be better off financially to ignore IRS requirements to register its tax shelters; and how some of the firm's employees held grave doubts about the validity of some of the products offered to investors.

 KPMG's Senate Testimony

KPMG has denied any wrongdoing and would not agree to FRONTLINE's requests for an interview. But here is the prepared testimony of two KPMG executives from the Senate Permanent Subcommittee on Investigations' November 2003 hearings into the U.S. tax shelter industry. Jeffrey Eischeid, the partner in charge of KPMG's Personal Financial Planning division, offers a four-part defense of KPMG's shelters, and Richard Smith, the firm's vice chair of tax services, describes the internal changes KPMG made.


In July 2002, the Justice Department and the IRS accused KPMG of failing to provide documents requested by the government and filed this civil lawsuit in an effort to force the firm to disclose information about tax shelters it has marketed since 1998. KPMG argued that the information requested by the Justice Department was protected by accountant-client and attorney-client privilege. The case is still pending in federal court and in December 2003, the Justice Department accused KPMG of further withholding documents, saying that its actions "demonstrate a concerted pattern of obstruction and non-compliance, threatening the integrity of the IRS examination process."


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posted february 19, 2004

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