This Wall Street Journal ($) article reports on the Justice Department’s decision to open a criminal investigation into Ernst & Young LLP’s promotions of potentially abusive tax shelters. This investigation follows on the heels of a separate criminal investigation into sales of certain tax shelters at KPMG LLP. Here are prior posts on Ernst and KPMG’s recent legal troubles.
The investigation of Ernst reflects the continuation of the Justice Department’s continued effort to crack down on tax evaders and their professional advisers, including accounting firms, law firms and financial institutions. A plethora of tax-shelter sales spurred by the late-1990s economic boom and stock-market rally is estimated to have reduced federal tax revenues by billions.
Earlier this year, the Manhattan U.S. attorney’s office notified KPMG that it had begun a criminal investigation into the firm’s promotion of certain tax shelters that the IRS has deemed potentially abusive. The initiation of a criminal investigation into Ernst’s similar activities comes at a time of growing concern in the business community that there already are too few major accounting firms (it’s the “Big Four” now) to audit the world’s largest companies.
The criminal investigation of Ernst is somewhat surprising in that Ernst last summer reached a civil settlement — which included payment of a $15 million penalty — with the IRS to resolve allegations that it failed to register its tax-shelter strategies with the government and maintain lists of investors who participated in them. Ernst disbanded the division that had been involved in developing and marketing its most aggressive tax shelters and, as part of the IRS settlement, Ernst also instituted organizational changes aimed at ensuring future compliance with federal and state tax laws. As a result, it was thought that the IRS settlement concluded the government’s action against Ernst for past shelter-related matters.