Accounting firm KPMG LLP is engaged in what could be life-or-death negotiations with the Justice Department over whether it will face criminal charges related to its marketing of abusive tax shelters during the 1990s.

Federal prosecutors in Manhattan have developed a criminal case against the firm. But KPMG has appealed to Justice officials in Washington, arguing that it has cleaned up its act and that the case can be resolved short of charges that could destroy the firm, according to sources familiar with the probe who spoke on the condition of anonymity because the case is at a delicate stage.

"KPMG takes full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred," the firm said in a statement issued yesterday, after a Wall Street Journal story reported on the negotiations.

KPMG already has dismissed several partners who played an active role in selling the tax shelters, clearing out its ranks and turning over documents and other material to investigators on the advice of corporate lawyers at Skadden, Arps, Slate, Meagher & Flom LLP.

"KPMG looks forward to a resolution that recognizes the significant reforms the firm has already made in response to this matter while appropriately sanctioning the firm for this wrongdoing," the statement said.

The question of how to proceed is a vexing one for the Justice Department, which through a spokesman declined to comment. Another accounting giant, Arthur Andersen LLP, prosecuted in the wake of the Enron Corp. failure, ultimately collapsed after clients fled in droves -- throwing thousands of people out of work and further reducing the number of big accounting firms able to review the books of large public companies. The U.S. Supreme Court recently overturned the firm's conviction because of faulty jury instructions.

Legal experts said the KPMG case differs from Andersen's, because Andersen had been cited repeatedly for infractions by securities regulators and because Andersen leaders did not publicly admit wrongdoing. Government lawyers use guidelines that emphasize corporate cooperation when deciding whether to indict companies.

Ultimately, KPMG's prosecutors could demand financial penalties but stop short of criminal charges. Or they could reach what is called a deferred-prosecution agreement with the firm. In a deferred prosecution, the defendant is on probation while it reforms its business practices. In exchange, criminal charges are delayed and the case is dropped if the firm fulfills its promises.

Such deals have become more common recently. Wednesday, for example, drugmaker Bristol-Myers Squibb Co. agreed to deferred prosecution and a $300 million fine on charges it inflated sales figures. But KPMG leaders apparently argue that even a deferred prosecution could irreparably damage the company's reputation as a provider of accounting and tax advice, the sources said.

KPMG bore deep involvement in the creation and sale of tax shelters, the Senate permanent subcommittee on investigations found.

Its "products," many going by esoteric acronyms such as FLIP, BLIPS and OPIS, allowed wealthy taxpayers, typically those who had recently had a large taxable gain, to create losses that could be written off to reduce or eliminate taxes on the gain.

In a report issued in February, the panel concluded that KPMG "developed and supported an extensive internal infrastructure of offices, programs, and procedures designed to churn out a continuing supply of new generic tax products, unsolicited by a specific client, for marketing to multiple clients."

KPMG also had "firm-wide numerical goals for new tax idea submissions and applied ongoing pressure on KPMG tax professionals to meet this goal."

The firm now says all that has changed. Earlier this year, KPMG hired former U.S. district judge Sven Erik Holmes to monitor its legal and regulatory affairs.