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Individual Accountability for Tax Shelters (C) Tax Analysts 2005. All rights reserved. does not claim copyright in any public domain or third party content. Individual Accountability for Tax Fortunately, there is a workable solution to identifying and holding accountable those who have been involved Shelters in blatantly egregious actions. When a tax return is professionally prepared, the preparer must sign the re- By William M. VanDenburgh and turn. That allows specific identification of the individual Philip J. Harmelink ultimately responsible for the approval of the final return. If a tax preparer signed a return using an abusive tax shelter, he/she should be dismissed from the firm and William M. VanDenburgh, Ph.D., is an assistant prohibited from practicing before the IRS. Importantly, professor of accounting at the University of New this individual accountability should occur on a Orleans ([email protected]). Philip J. Harmelink, profession-wide basis, not just for the Big Four. Ph.D., CPA, is a professor of accounting at the Univer- sity of New Orleans ([email protected]). When preparing and signing returns, accountants, attorneys, and enrolled agents are held to standards of Prof. VanDenburgh has also authored numerous ethical behavior under Circular 230.3 Tax professionals tax and accounting journal articles. Prof. Harmelink are specifically prohibited from giving ‘‘misleading infor- has authored numerous articles in tax, law, and ac- mation to the Department of the Treasury’’ in this core counting journals and is a continuing coauthor of the document on tax preparers’ responsibilities. annual editions of the CCH Federal Taxation: Basic Principles and Comprehensive Topics textbooks (since This article strongly asserts that those engaged in the 1984). son-of-BOSS and linked schemes violated this duty in a fundamental fashion and should be held strictly account- able by both the individual firms and regulators. By examining central tax issues and the actions of the major The ongoing impasse that the accounting profession marketers and producers of those schemes, many trou- faces in resolving its transgressions from the late 1990s to bling professional issues and obligations are readily the early 2000s is highlighted with the ongoing KPMG apparent. This article recommends strong individual tax shelter crisis. With the ‘‘Big Five’’ accounting firm accountability measures on the part of those firms en- group having already been reduced to the ‘‘Big Four’’ gaged in these activities (accounting firms, law firms, and after the Andersen demise, another major accounting investment banking firms). firm is facing a significant threat to its existence as a result of prior actions.1 While many within the profession Tax Schemes Without Merit would contend that KPMG’s or any accounting firm’s A prima facie claim as to the inappropriate nature of existence should not be in jeopardy because of the actions those various schemes is clear when one examines the of individual members, this overlooks the fact that many bottom line of those tax shelter schemes. For example, the individuals within those firms who directly approved following hypothetical scenario (first bullet) or issues those tax shelter products still have not been held ac- (second and third bullets) were part of those highly countable. Any further regulatory action (class-action aggressive tax shelter schemes that were forcefully mar- settlements or deferred prosecution agreements) should keted to taxpayers by accounting firms. expressly require immediate termination of those directly involved. Specifically, this article focuses on tax return • The OPIS shelter takes full advantage of a tax shelter signers who have an indisputable preparer responsibility strategy of using complexity as a defensive camou- for approving tax returns that were prepared for abusive flage to preclude meaningful review of the transac- tax shelters.2 tion. Complexity has a tendency to intimidate and deter any outside review. Still, the core of the deal, ignoring the complexities and fluctuations, is very 1 simple: Taxpayers bought $100 million worth of John R. Wilke, ‘‘KPMG Faces Indictment Risk on Tax artificial accounting losses at a price of $7 million in Shelters,’’ http://www.wsj.com, June 16, 2005, and Albert B. Crenshaw and Carrie Johnson, ‘‘Regretful KPMG Asks for a Break,’’ http://www.washingtonpost.com, June 17, 2005. 2This article does not directly address the responsibility of 3 senior management of accounting firms that engage in these Circular 230 is titled, ‘‘Regulations Governing the Practice activities. They should be held strictly accountable and termi- of Attorneys, Certified Public Accountants, Enrolled Agents, nated if involved. Merely avoiding the issue should not be a Enrolled Actuaries, and Appraisers before the Internal Revenue defense. Service.’’ TAX NOTES, August 22, 2005 933 COMMENTARY / VIEWPOINTS fees. At the 20 percent capital gains tax rate, the instance, the government will vigorously pursue losses would have been worth $20 million.4 the full tax due, applicable interest and the maxi- (C) Tax Analysts 2005. All rights reserved. does not claim copyright in any public domain or third party content. mum penalty.8 • KPMG’s internal documents showed that KPMG accountants believed that the step transaction doc- The accounting and legal professions, in general, trine destroyed the FLIP. In an e-mail to his sales failed in their public mission of not willfully engaging in team, Gregg Ritchie reminded them that they were fraud. The consequences should be severe and not just token steps. Identification and dismissal of those signing not to leave FLIP promotional materials with clients returns and those playing a central role is likely one of because it would ‘‘DESTROY any chance the client 5 the very few alternatives that accounting firms, legal may have to avoid the step transaction doctrine.’’ firms, and investment bankers have to effectively handle • Yet even before Congress took final action, tax this issue. In the final analysis, individuals freely signed experts were devising alternatives. PwC’s was the returns (and other linked documents) for son-of- BOSS, a dizzying whirl of partnership formations, BOSS and similar schemes. Simply stated, they should be loans, distributions and corporate conversions, fill- held strictly accountable. ing 45 pages with legal hair-splitting in one early Circular 230 version of its marketing materials.6 The ramifications of signing a tax return that is filed Pervasive Tax Schemes with the IRS should not be understated. Circular 230 is of fundamental importance when a tax return is prepared Unfortunately, it appears that all the major accounting and signed. This document spells out obligations when a firms have participated in tax sheltering schemes to some professional ‘‘practices before the IRS.’’ Circular 230 degree or another. While tax shelters per se are not illegal, contains specific rules that call for ‘‘disbarment or sus- the culture of the 1990s and 2000s led to a proliferation of pension’’ from practice before the IRS for inappropriate highly questionable tax shelters. For example, as early as behavior. 2000 The New York Times observed that corporate tax Section 10.51 titled ‘‘Incompetence and Disreputable sheltering schemes were pervasive:7 Conduct,’’ describes behavior that can lead to disbarment or suspension from practice before the IRS. Two highly All of the Big Five accounting firms — Pricewater- relevant portions state: houseCoopers, Ernst & Young, Deloitte & Touche, • Giving false or misleading information, or participat- KPMG and Arthur Andersen — now charge corpo- ing in any way in the giving of false or misleading rations a fee based on the savings from tax shelters information to the Department of the Treasury.... they design and sell. So do big investment houses, Facts or other matters contained in testimony,Federal notably Merrill Lynch, Goldman, Sachs and Bear, tax returns, financial statements, applications for en- Stearns. rollment, affidavits, declarations, or any other docu- ment or statement, written or oral, are included in the It is important to recognize that the deliberate disre- term information. gard of basic tax conduct was practiced not just by • Giving a false opinion, knowingly, recklessly, or accountants, but by attorneys and investment bankers. through gross incompetence, including an opinion As IRS Commissioner Mark Everson observed in May which is intentionally or recklessly misleading, or 2004: engaging in a pattern of providing incompetent opinions on questions arising under the Federal tax These transactions were developed and marketed laws. False opinions described in this paragraph (l) by an interlocking network of commercial interests, include those which reflect or result from a knowing including leading law firms, accounting firms and misstatement of fact or law, from an assertion of a investment banks. ‘‘Son of Boss’’ deals had only one position known to be unwarranted under existing purpose — the elimination of tax. We encourage law, from counseling or assisting in conduct known investors in these transactions to settle these dis- to be illegal or fraudulent, from concealing matters putes now to avoid more severe consequences later. required by law to be revealed, or from consciously ...Wearetaking this unusual step because of the disregarding information indicating that material severity of the abuse. Anyone who doesn’t come facts expressed in the tax opinion or offering mate- forward can still take the IRS to court. In
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