Treasury Dept. Picks KPMG as Auditor

Firm's Tax Shelters Under Investigation

The Treasury Department has tapped KPMG LLP as the first private firm to audit the agency's consolidated financial statements, even as the Treasury and Justice departments probe the accounting giant's marketing of potentially abusive tax shelters.

The contract has angered the bipartisan leaders of the Senate Finance Committee, who say it is part of a pattern of federal agencies condoning tax abuses -- from the Transportation Department encouraging abusive leasing arrangements to the Patent and Trademark Office issuing patents for tax shelters and the Interior Department participating in inflated land swaps. That pattern will be the subject of hearings Wednesday into government efforts to close the gap between taxes owed and taxes paid.

"If we could just get federal agencies not to work at cross purposes, it would go a long way toward ensuring everybody pays their fair share of taxes," said Senate Finance Committee Chairman Charles E. Grassley (R-Iowa). "The IRS's job would be a lot easier if other government agencies were part of the solution, not part of the problem."

KPMG is the subject of a federal grand jury probe into its tax shelter practice and has clashed repeatedly with the Internal Revenue Service over IRS demands that the firm release the names of clients who use its shelters, complex transactions to shield corporations and high-income individuals from portions of their tax bills.

Yet this month, in an internal memo first disclosed by the research firm Tax Analysts, KPMG announced Treasury had selected it to audit its consolidated financial statements. With $6.9 trillion in assets, the Treasury will be the largest audit ever for KPMG, although the value of the contract was not disclosed. KPMG will look over the books of Treasury's 12 bureaus, including the U.S. Mint, the Bureau of Public Debt and the Office of the Comptroller of the Currency.

"This extraordinary win is a testament to KPMG's outstanding record of client service, perseverance, and teamwork," the July 9 memo states.

Republican and Democratic Senate Finance Committee aides agreed the award is extraordinary but for a different reason. By awarding KPMG this contract, the Treasury Department is undermining its own tax probe, they said.

"What signal does it send when the government is hauling one of the big accounting firms into the grand jury room over tax fraud while handing that same company millions of dollars in taxpayer-funded contracts?" Grassley asked.

Treasury Department spokesman Robert S. Nichols said KPMG's selection was made by the agency's independent inspector general, who had been responsible for auditing Treasury's books.

"On the issue of tax shelters, let me affirm that the Bush administration has taken aggressive action to address the abusive tax shelter problem, more so than in any period in recent memory," he said.