The Internal Revenue Service said Wednesday it has reached a settlement with BDO USA LLP under which the accounting firm will pay a civil penalty of $34.4 million for violating tax laws concerning tax shelters.
The firm, formerly known as BDO Seidman LLP, did not register various tax shelters as required by law. The IRS said some of the tax shelters were abusive and fraudulent, and the firm did not register them in an effort to conceal the tax shelters from the IRS and help high-income taxpayers evade federal income taxes.
The $34.4 million penalty is part of a $50 million payment that BDO has agreed to pay the United States in connection with the filing of an Information charging the firm with one count of engaging in a tax fraud conspiracy from approximately 1997 to 2003, and a deferred prosecution agreement with the United States for the criminal charge if specific conditions are met. The $15.6 million portion will be paid to the Justice Department.
In addition to the civil penalty payment, BDO has agreed to cooperate with the IRS in civil matters, including IRS audits and litigations relating to its tax shelter products, and to work with the IRS to ensure that it is in compliance with federal tax laws involving tax shelters.
“Today’s enforcement action is another reminder that taxpayers can't hide behind complicated schemes or corporate tax shelters,” said IRS Commissioner Doug Shulman in a statement. “The IRS is strongly committed to stopping illegal tax shelters.”
BDO has made a commitment to cooperate with the IRS in civil matters involving tax shelters and to ensure that it fully complies with the federal tax laws involving tax shelters, the IRS noted.
According to the IRS, between 1997 and 2003, BDO violated federal tax laws concerning the registration, maintenance and turning over to the IRS of tax shelter investor lists, involving abusive and fraudulent tax shelters. Through a group within the firm known as The Tax Solutions Group, BDO developed, marketed, sold and implemented fraudulent tax shelter products to high net worth individuals, who had, or expected to have, reportable income or gains in excess of $5 million.
BDO’s tax shelters, while designed to appear to the IRS to be investments, were, in fact, a series of pre-planned steps that helped BDO’s high net worth clients to evade individual income taxes of approximately $1.3 billion, according to the IRS. The fraudulent tax shelters were sometimes known under the names SOS, Short Sale, BEST, BEDS, Spread Options, Currency Option Investment Strategy or “COINS,” Digital Options, G-1 Global Fund, FC Derivatives, Distressed Asset Debt, POPS, OPIS, Roth IRA, and OID Bond. The case dates back to 2002.
BDO indicated it was relieved to finally settle the decade-old case. “BDO USA said that it has reached a resolution with the Internal Revenue Service and the Department of Justice with respect to their investigations of BDO’s involvement in tax shelters for high net worth clients between 1997 and 2003,” the firm said in a statement. "BDO has entered into a six month Deferred Prosecution Agreement with the United States Attorney’s Office for the Southern District of New York and a Closing Agreement with the Internal Revenue Service. Under the terms of the agreements, BDO will pay a total of $50 million. As the firm has worked towards this resolution, the partnership has taken appropriate measures to ensure there will be no impact on its business operations and client services. This is the latest step in the federal government’s investigations of numerous national accounting, law and financial services firms, which began almost ten years ago. BDO has cooperated with the IRS and the United States Attorney’s office and will continue to do so. BDO is pleased that these matters have been brought to a resolution. The firm does not intend to comment further on this matter.”
The IRS and the Justice Department have prosecuted a number of the other major firms for similar tax shelters. PricewaterhouseCoopers settled in 2002 for a “substantial payment” (see PwC Agrees to Settle Tax Shelter Charges with IRS). Ernst & Young settled for $15 million with the IRS (see Ernst & Young Settles tax Shelter Suit for $15 Million). KPMG agreed to pay $456 million in fines, restitution and penalties in 2005 (see KPMG Settles Tax Shelter Case)
However, the litigation is not finished yet with some of the individuals involved. Earlier this month, a federal judge threw out the tax fraud convictions of former BDO Seidman chairman and CEO Denis Field and two attorneys who had been charged with conspiring to market the tax shelters between 1994 and 2004 (see Judge Throws out the Conviction of Former BDO CEO). They had been convicted last May.