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US investigators expected to charge KPMG partners

A US federal investigation of questionable tax shelters sold by KPMG, the large accounting firm, is about to take a long-anticipated step if, as expected, former partners at the firm and others involved are indicted on criminal charges, possibly as early as this week.

Last week, KPMG reached an agreement with the government that headed off an indictment of the firm itself, according to people briefed on the deal. As part of the agreement, which was expected to be announced yesterday, the firm would acknowledge wrongdoing, a move that will bolster prosecutors' case against the former KPMG partners and others.

Last week's settlement is a victory of sorts for KPMG and vindication of its legal team, led by Robert Bennett of Skadden Arps Slate Meagher & Flom, because it gives the firm a chance to avoid the kind of criminal case that proved fatal for another accounting firm, Arthur Andersen, Enron's auditor.

At the same time, the willingness of prosecutors to file criminal charges against former partners at the accounting firm may portend a new toughness in enforcing the rules governing complex and lucrative tax strategies.

"If they indict, it will be a shock wave through that part of the tax practice," said Daniel Simmons, a professor who teaches tax law at the University of California, Davis.

No court has ruled that the KPMG tax shelters were improper, which made the admission of wrongdoing from the firm important to prosecutors' efforts to build a case against any former partners. But prosecutors will probably broaden their case, which would make the propriety of the tax shelters less important. Prosecutors are also expected to focus on the conduct of the former partners -- for example, representations that might have been made in connection with selling the shelters.

An indictment, let alone a conviction, would send a message to those involved that they face more than civil liability if they were involved in overly aggressive tax transactions.

What has made the KPMG case so different from a typical action by the Internal Revenue Service is the outside pressure from lawmakers, according to lawyers involved. That has led to much more aggressive tactics by the government, the lawyers said.

"The entire flavor and complexion of the matter totally changed" after a Senate subcommittee held a hearing on the transactions in November 2003, said one lawyer who would speak only on the condition of anonymity because he is involved in the case.

"I saw it, and I knew it was going to change, and indeed it has changed," he said.

Normally, in an issue involving questionable shelters, the IRS might disallow a claimed loss, said Steven Dean, a law professor at Brooklyn Law School. Then, Dean said, a taxpayer has two options.

"Either the taxpayer can pay the tax," he said, and sue the IRS for a refund, "or can refuse to pay the tax and file a suit in a tax court."

Some firms involved in the tax shelter transactions sold by KPMG have sued the IRS; a ruling could come by the end of the year.

In the criminal case against former KPMG partners, prosecutors will probably try to show why the sophisticated transactions were illegal. They will also try to show that in marketing the shelters, former partners engaged in misconduct.
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