So, lawyers and accountants, would you dob in your clients to avoid criminal penalties?
I.R.S. Offers Deal to Firms Promoting Tax Shelters
The Internal Revenue Service is making an unusual offer of leniency to firms that made and
sold questionable tax shelters: come forward, pay penalties and turn over information, and
you may avoid criminal prosecution.
The offer is being made to accounting firms, law firms, banks and investment firms that
have created and sold tax shelters that the I.R.S. considers bogus, as well as to firms that
carried out the financial transactions that underpin such shelters. Questionable shelters
have been sold to thousands of wealthy investors in recent years. Under the offer, the
firms must disclose the names of those investors.
Firms that do not come forward face larger fines and possible criminal prosecution,
according to a copy of the four-page offer now being mailed to firms. A spokesman for
the I.R.S. confirmed the contents of the letter.
The I.R.S. has extended similar offers to wealthy investors in recent years, but this is the
first of its kind to firms that promote tax shelters.
The offer has some carrots. The agency is offering to not disclose publicly the names of
firms that come forward or the terms of their settlements. It also offers to assess no
penalties against the firms for failing to provide information about investors earlier. (Firms
are already required to keep lists of investors in shelters that the I.R.S. considers abusive.)
Other penalties will still apply.
The I.R.S. expects to bring in several billion dollars through the offer once the program is
completed later this year, according to people briefed on the program.
Offers will be made to at least 66 tax shelter promoters and possibly more, but probably
not to all 118 firms now being actively audited by the I.R.S. for their work on aggressive
shelters, according to the people briefed on the program.
The I.R.S. began making its offers to promoters in late December, and has so far sent out
about 30 letters. It expects to extend remaining offers in coming months. The offers cover
questionable transactions sold before Oct. 22, 2004, and give firms 30 days to pay.
Under the offer, the I.R.S. reserves the right to refer to its own criminal division any
employees from firms that received amnesty whom it suspects of having broken the law.
More significantly, the agency reserves the right to refer firms and employees to the
Justice Department for criminal prosecution.
The offer comes at a time when the Justice Department has brought criminal charges
against 17 former professionals with the accounting firm KPMG, an outside lawyer and an
investment adviser. The 19 are accused of scheming to defraud the I.R.S. through the
creation and sale of four tax shelters. All are fighting the charges.
Federal prosecutors in Manhattan have also been investigating the role of three lawyers in
questionable tax shelters.
Tax lawyers said yesterday that the I.R.S.'s offer would not affect the government's ability
to conduct criminal prosecutions in tax shelter cases.
Carolyn D. Ciraolo, a tax lawyer in Baltimore, said that any firms that cooperate with the
government are more likely to help the government build cases against another firm or
It is unclear how popular the offer will be among promoters. "It is a bad deal," said one
lawyer who represents an accounting firm that has been sued by investors who bought its
shelters. He said that the I.R.S. wanted too much information under the offer, citing a
requirement that marketing materials and other documents must be turned over, leaving a
firm potentially exposed to further investigations and prosecutions.
Tax shelters typically require an accounting firm to design and sell the shelter, a law firm
to write legal opinions blessing the transactions and a bank or investment firm to carry out
the financial workings. Dozens of accounting, law and financial firms have been named in
civil complaints filed by former investors as promoters of questionable shelters. A 2003
report by a Senate subcommittee on aggressive tax shelters described the roles of
Deutsche Bank and the law firm Sidley Austin Brown & Wood, among others.
Until now, the I.R.S. has confronted promoters of abusive shelters by assessing penalties
for violating rules that required firms to register such shelters and to keep lists of
investors who buy them. Penalties are calculated either as 1 percent of the losses claimed
by a taxpayer, or as much as 50 percent of the profits earned by the promoter.
Current regulations on penalties for promoters allow the I.R.S. to collect from a single
promoter all of the penalties due on a single shelter transaction involving multiple
But under the amnesty offer, the I.R.S. proposes to collect only a portion of each
promoter's penalty due on each shelter, calculated as a percentage reflecting the firm's
degree of participation in the transaction.
"We view this as a bit of an incentive to encourage promoters to come forward, so that
they will pay their pro-rata share and not somebody else's share," said Eric L. Smith, an
But promoters have not always seen shelter-related penalties as a barrier to doing
business. According to the Senate report, a 1998 memorandum written by Gregg W.
Ritchie, a former KPMG partner and one of the 19 indicted, concluded that aggressive
shelters were so profitable as to make the fines and penalties worth the risk.
Gary V. Mauney, a lawyer with Lewis & Roberts in Charlotte, N.C., who represents investors
suing the firms that sold them tax shelters, said of the I.R.S. offer yesterday: the "I.R.S. is
essentially following the logic of the Ritchie memo. Promoters are going to look at this
offer and laugh all the way to the bank."