Ernst & Young LLP has agreed to pay $123 million to resolve a federal tax shelter investigation while admitting wrongful conduct by certain E&Y partners and employees.
The agreement comes in connection with the firm’s admitted participation, from 1999 to 2004, in four tax shelters that were used by approximately 200 E&Y clients in an effort to defer, reduce, or eliminate tax liabilities of more than $2 billion, according to the Manhattan U.S. Attorney’s Office.
E&Y entered into a non-prosecution agreement with the United States, in which the firm agreed to pay $123 million to the United States and acknowledged a detailed Statement of Facts in which it admitted the wrongful conduct of certain partners and employees. E&Y also agreed to certain permanent restrictions and controls on its tax practice, including a prohibition against planning, promoting or recommending any “listed transaction,” which is the same as, or substantially similar to, one that the IRS has determined to be a tax avoidance transaction.
The NPA also requires E&Y’s continued cooperation with the government’s investigation. In exchange, the United States agreed not to criminally prosecute E&Y for its participation in the tax shelter scheme. The NPA applies only to E&Y and not to any individuals. The Justice Department noted that E&Y has cooperated with the government’s investigation into these tax shelters since approximately 2003. In the event that the firm violates the agreement, however, the U.S. Attorney’s Office may prosecute E&Y.
According to the Statement of Facts to which E&Y has admitted, and as proven at the criminal trial of certain former E&Y partners:
Beginning in 1999 and ending in 2002, E&Y, in conjunction with various law firms, banks, and investment advisers, developed, marketed and implemented four tax shelter products called COBRA, CDS, CDS Add-On, and PICO. E&Y implemented these four tax shelter products for approximately 200 high net worth clients in an effort to defer, reduce, or eliminate $2 billion in aggregate tax liabilities. E&Y prepared tax returns reflecting tax losses claimed to have been derived from those tax shelter products and subsequently defended certain of its clients in connection with audits of those transactions by the IRS.
A small group within E&Y known as the Strategic Individual Solutions Group was primarily responsible for supervising and coordinating the marketing, implementation and defense of E&Y’s tax shelter products. Certain SISG tax shelter products were designed to appear to the IRS to be substantive investments that had favorable tax consequences when, in reality, the products were actually designed and marketed to clients as a series of preplanned steps that would defer, reduce or eliminate their tax liabilities. The typical client participating in these shelters was primarily, if not exclusively, motivated to achieve a desired tax savings.
In order to deceive the IRS as to the true nature of the tax strategies, and to bolster arguments that the transactions had economic substance, some SISG personnel agreed upon and directed other E&Y employees to participate in a concerted effort not to create, disseminate, or publicize documents reflecting the tax motivation behind the strategies, or the preplanned sequence of steps necessary to effect the strategies. These SISG personnel thereby sought to prevent the IRS from detecting their clients’ purposes in employing these strategies. For example, in certain instances, members of SISG falsely portrayed the transactions under examination as purely investment-driven transactions, and falsely denied a tax motivation for the transactions in response to IRS Information Document Requests and in testimony to the IRS.
Further, in implementing the sale of tax shelter products, certain members of SISG also prepared documents or correspondence that falsely and inaccurately reflected events or conversations, and that were designed to improperly influence the IRS’s view of the merits of the transactions in the event of an audit. These activities continued into 2003 and 2004.
11 Comments
Nostromo49's suggestions (see below, Mar. 4 at 2:00) are very good. Since our nemeses are, in their own eyes, merely taking the calculated risks expected of Masters of the Universe, let's make the risks wildly disproportionate to the rewards, instead of the other way around. When we simply fine the firms, what happens? The (in)human perpetrators seldom suffer, and the fines are borne by essentially powerless shareholders and customers. Let's get out our (political) pitchforks and torches, and storm the monsters' castles - what do you say?
Posted by: ccaylor | March 14, 2013 1:04 PM
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Yet another incident of naked, arrogant, heedless greed from the "leaders" of our profession. These vile, utterly crass mentalities are undermining the very foundations of our economy, and not just in our profession. Banking and insurance in particular have come to be dominated by a "leadership" culture that brutally calculates the probable return on criminal behavior, but it appears in all industries, of course. Even health care administrators, as they methodically and ruthlessly exploit their cost-plus environment, have joined the feeding frenzy. How about you? Do you feel like you're part of a civilized society or a bait ball? These people deserve a new pejorative: how about the "lootership culture"? Maybe "raidership" or "bleedership"?
Posted by: ccaylor | March 14, 2013 12:32 PM
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If smaller CPA or Firm are punished by not allowing them to practice and severe displinary actions are taken why E & Y should not be banned from practice and why severe displinary actions are not taken against directors, partners. Monetary fine is not enough they should be prevented from practing in tax are Ramesh
Posted by: Rameshmaskai | March 8, 2013 12:44 PM
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The Big 4 seem to get embroiled in these types of problems regularly. If the small practioner looks the wrong direction we lose our firm permits and licenses. It just seems the playing field here is extremely unequal. Still can't understand why TurboTax gets to provide premium CPA services without being a licensed CPA firm. Just guess they're up in the stratosphere with the Big 4.
Posted by: Mike1956 | March 6, 2013 11:05 AM
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It is a disappointment to the profession to see firm like this get away with this. There should have been jail time for someone if not many more. This just continues to make the IRS want to look ever closer into everything we do. Just plane disappointing.
Posted by: brendalee | March 4, 2013 5:33 PM
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One just can't believe Accountants. Worse than Economists, because we EXPECT economists to conjecture, and nobody really believes them. Now, the same for Accountants, plus Fraud. SOLUTIONS: 20 years State Prison time for Executives and Management people involved. 20 times the amount of the Fraud in Fines. 5 years State Prison time for any CPA who has information relating to the Fraud from within the company and who fails to come forward with such information. 25% of any fines remunerated to whistle-blowers from within the company or who have left the company over fraud issues. Restriction of the Company from any further Accounting for businesses of the size for which the fraud was created.
On Main Street a murderer expects the death penalty. On Wall Street a murderer expects a fine. On Any Street what do you expect your neighbors would do to you?
Posted by: nostromo49 | March 4, 2013 2:00 PM
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Let me understand this. E&Y agrees to pay the fine and admits wrongdoing. Andersen wants their day in court and before any criminal indictment is issued, or the firm will blow up.
As the facts later come out, Enron was corrupt and there was collusion and just maybe the feds overreacted. But the feds indict, Andersen blows up, only later to have the case overturned on appeal long after Andersen is dead.
As an Andersen alum, I think they may have indicted the wrong firm.
As least a couple of Enron guys ended up in jail. How many E&Y folks will serve some time? Answer: none.
And the beat goes on.
Posted by: topbeancounter | March 4, 2013 1:22 PM
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MONEY MEANS PAY SO YOU DON'T DO TIME. AND MONEY IS NOTHING TO A BIG FOUR FIRM LIKE THIS. YES THEY RECEIVED 350 MIL PROMOTING SHELTERS. WHAT HAPPENED TO VESTED INTEREST, ARM'S LENGTH CPA'S, NOW THE CPA IS IN BED WITH TAX SHELTERS, REAL ESTATE VENTURES, AND MAKING MONEY ON CLIENTS THAT THEY SELL TO? WOW, AND WE DON'T WANT THE IRS TO REGULATE? THEY ALL SHOULD HAVE TO BE ENROLLED AGENTS AND TAKE ALL THE TAX COURSES, AND THEY SHOULD LOSE THEIR LICENSE FOR DOING THIS. FRAUD IS FRAUD, ERROR IS ERROR, TO ERR IS HUMAN TO ACT IN A FRAUDULENT BEHAVIOR IS CRIME. ENROLLED AGENT CANDIDATE SALLYANNE@TAXLADYX.COM HUMAN NOT CRIMINAL!
Posted by: sallyannehaydon | March 4, 2013 12:47 PM
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I am curious as to why company like e&y will distort smaller tax practioners, when their company continues to mislead the cpa profession.
Posted by: humanerro | March 4, 2013 10:13 AM
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According to the IRS the only reason for the Exam, the Due Diligent list and all the other boxes we need to check or get unlimited fines if we don't....,is to make sure that Tax Preparer have a knowledge of the taxes they are preparing... Burt, according to the article above, the more you know ...the more you defraud the IRS...So what's wrong with this picture???????? Was the IRS really worried about the Tax Prepares competence...or was the IRS just trying to eliminate the competition for H&R and all the other tax stores???????? While creating a terrific 'cash caw" for themselves? When I read articles like the one above I just get disgusted because,like curtis who commented before me,I know that E&Y promoted, lobbied and I am sure paid dearly (while getting paid handsomely themselves...)for all those loopholes to be incorporated in the law while they knew, all along, they would be sued to defraud the Government!
Posted by: SNAFU | March 4, 2013 9:17 AM
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Seems that I remembered some time ago reading that E&Y earned more than $350 million in fees promoting those shelters. So looks like crime pays??????
Posted by: curtis@curtismathews.com | March 4, 2013 8:15 AM
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