Washington (Nov. 21, 2003) -- The Internal Revenue Service’s increasingly aggressive crackdown on abusive tax shelters appears to be the key reason that major accounting firms have backed away from these tax avoidance schemes, IRS Commissioner Mark Everson told congressional investigators.

Testifying at the second day of Senate Government Affairs Subcommittee hearings into the role of accountants and other professionals in the “tax shelter industry,” Everson noted that witnesses from KPMG, Ernst & Young and PricewaterhouseCoopers who testified at the first hearing earlier this week indicated that “the biggest accounting firms no longer engage in mass marketing” of abusive tax shelters.

“If this is true,” he said, “we believe that IRS efforts may have played a significant role in this development.”

According to the tax commissioner, accounting firms and their clients “may have recognized the increased risk of detection of tax returns claiming tax benefits from abusive tax avoidance transactions.”

Everson appeared before the subcommittee along with other key federal regulators, who also decried the accounting profession’s involvement in the promotion of tax shelters.

Public Company Accounting Oversight Board Chairman William J. McDonough served notice to Congress and the profession that his organization will be on the lookout for abusive tax avoidance schemes as it conducts inspections of accounting firms during the coming year.

Even though “existing laws and regulations may not ban auditors from promoting and giving tax opinions on complex, structured transactions to their audit clients, both auditors and public companies should expect heightened scrutiny of such transactions” from the PCAOB, he told Congress.

“The prospect of that scrutiny may help to influence” corporate management, audit committees and auditors “not to engage in questionable transactions,” he said.

One federal regulator at the Senate hearings conceded that his agency is not equipped to crack down on tax shelter abuse by accountants or businesses.

Federal Reserve Banking Supervision & Regulation director Richard  Spillenkothen told the subcommittee that government bank examiners “are not legal or tax experts” and “are not trained to identify violations of non-banking laws or compliance with the tax code.”

The Fed representative also cautioned against holding bankers responsible for abusive tax shelter activities promoted by their customers’ accountants.

While banking organizations “should not, of course, participate in activities that they know or suspect to be illegal,” Spillenkothen said that “as a general rule” banks should not “be required to second-guess their customers’ accountants, tax or legal experts, or to police their customers’ and third-party professionals’ business activities.”

-- Ken Rankin

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