A former attorney at BDO Seidman has pleaded guilty to tax evasion and tax fraud charges in connection with a tax shelter scheme.
Michael Kerekes, 46, pleaded guilty last Friday to one count of conspiring with tax shelter promoters to lower the taxes of clients of both BDO and a law firm, Jenkens & Gilchrist. He also pleaded guilty to one count of tax evasion in connection with a multi-million-dollar tax shelter transaction of a client, at whose IRS audit Kerekes gave false and misleading testimony. Kerekes faces up to 10 years in prison and a $500,00 fine.
From 1998 until 2003, he was a member of BDO’s Tax Solutions Group, which designed and marketed high-fee tax strategies for wealthy clients, including tax shelter transactions. TSG management utilized a bonus structure that rewarded the personnel involved in implementing and selling the group’s transactions. In addition, the CEO of the firm doled out additional bonuses from the profits earned as a result of the sale of the tax shelter products, according to prosecutors. The firm made the sale of the tax shelter products a focal point of aggressive product promotion activities, using a "Tax $ells" logo and other marketing hype to induce employees to generate additional sales.
BDO said that the firm is no longer involved in that business, however. “Mr. Kerekes is a former BDO Seidman partner,” said BDO in a statement. “He was a member of a group of partners within the firm that marketed tax shelter products. That group was dissolved by BDO several years ago. BDO Seidman has cooperated fully with the government’s tax shelter investigation and will continue to do so. The firm does not intend to comment further on this matter.”
While serving as a member of the TSG, Kerekes, along with other TSG partners, engaged in the design, sale and implementation of two different tax shelter transactions with the Chicago office of Jenkens & Gilchrist, as well as an unidentified international bank with its U.S. headquarters in New York. As an attorney, Kerekes knew that the tax shelter transactions he helped devise and sell would be respected and allowed by the IRS only if the client had a substantial non-tax business purpose for entering the transaction, and the client had a reasonable possibility of making a profit through the transaction, according to prosecutors.
Prosecutors contended that Kerekes and his co-conspirators also knew and understood that the clients entering into the tax shelter transactions had neither a substantial non-tax business purpose, or a reasonable possibility of earning a profit, given the large amount of fees being charged by the accounting firm and Jenkens & Gilchrist to enter the transaction. Those fees were set by the co-conspirators as a percentage of the tax loss being sought by the tax shelter clients.
In order to make it appear that the tax shelter clients had the requisite business purpose and possibility of profit, Kerekes and his co-conspirators reviewed and approved the use of a legal opinion letter issued by Jenkens & Gilchrist that contained fraudulent representations purportedly made by the clients about their motivations for entering into the transactions. They also allegedly created other false documents in order to paint a picture for the IRS that the clients had a legitimate non-tax business purpose for entering and executing the transaction. In total, the fraudulent tax shelter transactions caused clients to report over $1 billion in false and fraudulent tax losses, resulting in the evasion of over $200 million of taxes due to the IRS.
Kerekes also admitted that he made false and misleading statements to the IRS regarding the tax shelter transaction of one of his clients who was selling his company. The client was charged approximately $145,000 in order to produce losses to offset the taxes due to the IRS on the $5 million the client received for the sale of his business.
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