Treasury Dept. Picks KPMG as Auditor

The inspector general followed federal contracting regulations in bidding out the contract, said inspector general spokesman Richard Delmar. With the downsizing of the Treasury Department inspector general's office, which shifted 70 percent of its resources to the Department of Homeland Security, the office decided to contract out the auditing, he added.

KPMG spokesman George Ledwith said none of the firm's employees involved with the federal investigation will be participating in the Treasury audit, nor will KPMG be examining the IRS's books. The IRS audit, by statute, must be conducted by the U.S. General Accounting Office to protect taxpayer confidentiality, he said.

"Before accepting the engagement, KPMG thoroughly considered all aspects of its independence with Department of the Treasury," Ledwith said. "The Treasury audit engagement meets all those standards of independence."

The Finance Committee has butted heads repeatedly with the Bush administration over what it sees as executive agencies promoting tax abuse. In November, Grassley wrote to Transportation Secretary Norman Y. Mineta, demanding cooperation on a probe of leasing arrangements. Under the deals, large companies give municipal governments or transit agencies large, up-front payments to "lease" a subway system, bridge or stadium, then reap far larger tax benefits by writing off the value of the structures on their taxes for years to come.

Officials for the Washington area's Metro system said in January that such arrangements -- which Metro views as both legal and encouraged by the Transportation Department -- generated $100 million for the system over the past six years.

In February 2000, the Federal Transit Administration issued guidance encouraging transit agencies to strike such deals as a novel financing technique, and Grassley told Mineta his agency may still be approving such deals. Federal Transit Administration spokeswoman Melissa Sabatine said the agency suspended consideration of any new leasing transactions late last year at Treasury's request.

In December, Sen. Max Baucus (D-Mont.), the committee's ranking minority member, launched a probe into the Department of the Interior's planned acquisition of mineral rights from a seller who planned to claim a large charitable tax deduction from the deal. Finance Committee aides said the Interior Department has also signed off on several historical easements, in which property owners in neighborhoods such as Georgetown promise to preserve the historic facade of their homes. They then deduct up to 15 percent of the value of the mansions from their taxes, claiming they had donated it to charity.

The L'Enfant Trust, a Washington preservation group, lists 100 such easements granted for Georgetown, 30 in Cleveland Park and 117 on Capitol Hill.

Next week, the Finance Committee will question officials from the U.S. Patent and Trademark Office about the rising issuance of patent protections for potentially abusive tax shelters, even as the IRS tries to clamp down on such activity. Lawrence L. Bell, for instance, was granted a patent last August for an "invention" to allow wealthy executives to shield income and estate taxes through deferred-compensation packages.

"We want to understand why the patent office is blessing tax shelters," said a Republican investigator, who spoke on condition of anonymity because he did not want to preempt committee senators before the hearing.

Patent officials declined to comment before the hearing.

Also at the hearing, Grassley will release a General Accounting Office study finding that U.S. Citizenship and Immigration Services has been failing to uphold its obligations under tax law. The service is not supposed to issue visas for foreign workers until the requesting companies or individuals prove they have paid all back taxes. But, Finance Committee aides said, the GAO found the service has been simply taking the applicants' word for it and not checking with the IRS.

"The GAO report is going to show huge problems in River City, stunning problems in River City," the investigator said.