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.
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.