Lawyers for former senior-level tax executives at KPMG LLP have been meeting with Justice Department officials this week in an effort to avert criminal charges related to the firm's sale of abusive tax shelters.
The lawyers are trying to persuade officials in the District-based tax division to reject a recommendation by federal prosecutors in New York to seek multiple criminal indictments. Last week, The Washington Post reported that as many as 20 former partners at KPMG, the nation's fourth-largest accounting firm, had been notified they could face charges.
Meanwhile, the government is laboring to reach a settlement with KPMG that would require the firm to hand over as much as $500 million in financial penalties and agree to increased monitoring of its operations. Senior prosecutors in Washington have expressed concern that indicting KPMG could cause it to collapse, leaving only three big firms capable of auditing large public companies.
Lawyers involved in the case, who spoke on condition of anonymity because of the delicate stage of the investigation, said they fear the government will come down particularly hard on individuals who sold or approved the tax shelters because of the sensitivity of charging KPMG itself with a crime.
Under Justice Department guidelines adopted after the collapses of Enron Corp. and WorldCom Inc., prosecutors encourage companies to avoid corporate criminal charges by firing employees responsible for wrongdoing and limiting the amount of attorney fees the company will pay on behalf of former workers. To date, KPMG has fired more than a dozen partners with ties to tax shelter marketing in the late 1990s and early 2000s, including its former vice chairman and the onetime leaders of its tax services and national tax practice. In June, the firm released a statement acknowledging "unlawful activity" by unnamed former partners.
But lawyers for the onetime KPMG partners argue that their clients simply followed an aggressive policy to promote tax shelters that had been adopted at the highest levels of the firm. The shelters brought in $124 million in fees for KPMG between 1997 and 2001, according to a report by Sen. Carl M. Levin (D-Mich.) and the Senate permanent subcommittee on investigations.
Defense lawyers claim that the shelters, which produced large paper losses to offset tax bills for wealthy individuals, were not illegal at the time they were sold and that the deals were approved by outside lawyers. Moreover, they say, the firm mishandled the early stages of the investigation by refusing to turn over documents to the Internal Revenue Service and drawing the ire of regulators. A spokesman for KPMG declined to comment other than to say the firm is cooperating with prosecutors.
Rivals at PricewaterhouseCoopers LLP and Ernst & Young LLP eventually settled charges with the IRS over the shelters. Ernst disclosed earlier this year that it, too, is under investigation by federal prosecutors in New York.